strategies-init Archives - Page 63 of 75

Conflicts of Interest and Credit Rating Agencies

April 23, 2026January 15, 2014 by Brotman Law

Effects of the Dodd-Frank Act on Conflicts of Interest

Key Takeaways

If any employee of an issuer, underwriter, or sponsor of a security…had previously been employed by the NRSRO and participated in determining the credit rating of that entity during the one year pe…
By implementing this look-back requirement, the bill seeks to eliminate conflicts of interests by closing the ‘revolving door’ that exists between NRSROs and the agencies which they provide ratings…
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In addition to administering rating and disclosure rules, The Dodd-Frank Act also imposes several requirements on NRSROs to establish internal control systems that prevents conflicts of interest. The bill’s drafters made it a priority to put certain guidelines in place in order to mitigate the temptation toward favoritism within the rating agencies. Without the conflicts, or with the proper steps to mitigate them, the rationale is that more certainty would exist about the objectivity of the ratings.

Dodd-Frank and Credit Rating Agencies

April 23, 2026January 15, 2014 by Brotman Law

Addressing Credit Rating Agencies Through Enactment of Dodd-Frank

Key Takeaways

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[1] “BRIEF SUMMARY OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT”.
[2] “Dodd-Frank Wall Street Reform and Consumer Protection Act: Credit Rating Agency Provisions.” http://www.orrick.com/fileupload/2822.htm .

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was passed and signed into on July 21, 2010. A small part of this act addressed credit rating agencies and their past practices. The act intends to (1) remove references in statutes and regulations to Nationally Recognized Statistical Rating Organizations (“NRSROs”), (2) create a new office of credit ratings, (3) to expand conditions that deal with conflicts of interest that may exist both inside the credit rating agencies and with the issuers and underwriters that they deal with, (4) promote rules for better internal governance and control, (5) define new requirements for the board of directors, and (6) institute harsher consequences for non-compliance with the law.^{^[1]}

Issues Affecting Credit Rating Agencies

April 23, 2026January 15, 2014 by Brotman Law

Competency, Trustworthiness of Ratings, and Conflicts of Interest

Key Takeaways

Competency, Trustworthiness of Ratings, and Conflicts of Interest Credit rating agencies have not been held accountable for their ratings.
Providing these favorable ratings often required the agencies to jeopardize the integrity of these ratings by altering the methodology in which they are calculated.

Credit rating agencies have not been held accountable for their ratings. Meaning, an inaccurate rating brings no repercussion to these agencies. If one is not held accountable for their actions, logically there is less incentive to perform well or even at a high standard.

These agencies knew their services were needed under government recommendation yet they were not held to a standard which required the utmost diligence and scrutiny to measure the accuracy of their ratings (15 Chap. L. Rev. 138). This type of attitude towards the agencies allowed the agencies to become comfortable with their existing practices and did not encourage any improvements in the methods these agencies used to rate the instruments.

Credit Rating Agencies – Part One

April 23, 2026January 15, 2014 by Brotman Law

What is a Credit Rating Agency and What Task Does it Perform?

Key Takeaways

The courts viewed the ratings merely as opinions offered by these agencies based on the information available and the assumptions the agencies put in place while rating these instruments.
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Since 1931, the United States government has encouraged or even required certain types of investors to use financial instruments or securities that have been rated high by rating agencies (15 Chap. L. Rev. 139). These agencies use available financial data, economic conditions, and various other factors to determine the strength of a particular firm, security, or instrument offered on the market. Logically, no rational investor would choose to use a financial instrument that possessed primarily bad qualities. The market should realize these bad qualities and the price of this instrument should decrease accordingly.

The credit rating agencies provide ratings which investors are advised or even required to rely on when investing in certain financial instruments. These ratings are intended to provide the investor with an accurate picture toward the quality of the financial instrument without having to do the tedious homework required to determine if credit rating given by an agency is in fact an accurate rating. Under this logic, in comparison to the average individual investor, shouldn’t a credit rating agency be more qualified and have more information to provide the most accurate credit ratings available?

Innocent Spouse Relief & Actual Knowledge

April 23, 2026January 15, 2014 by Brotman Law

Innocent Spouse Relief

This is the most commonly known form of relief, which can absolves a taxpayer from liability if their spouse or former spouse either did not report income, made an error in the calculation of income, or misapplied any deductions or credits that they were not entitled to.[1] Innocent Spouse Relief relieves a person of any tax, interest, and penalties associated with the account based on the preceding errors. However, the taxpayers are still held jointly and severally liable for any amounts that are not granted innocent spouse relief. The following requirements must be met in order for innocent spouse relief to be granted.

Key Takeaways

2. There is an understated tax on your return, i.e. the IRS determines that your total tax should be more than the amount that was actually shown on your return.
4. You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed (Absence of “Actual Knowledge” or “Reason to Know”).
5. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. (“Unfairness”).

Theory of IRS Innocent Spouse Relief

April 23, 2026January 15, 2014 by Brotman Law

Because of certain benefits that filing jointly allows, many married taxpayers elect to file joint returns. However, filing a joint return carries the added burden of both parties being liable for the tax due. In addition, under the Internal Revenue Code, married taxpayers who file jointly are each liable for any additions to the tax, penalties, or interest associated with the account.[1] This is a concept in the law known as joint and several liability, meaning that the spouses are responsible for any tax liabilities together (jointly) but can be held responsible for them as individuals (severally).

Key Takeaways

Because of certain benefits that filing jointly allows, many married taxpayers elect to file joint returns. However, filing a joint return carries the added burden of both parties being liable for the tax due.
From a practical standpoint, the IRS does not have the resources to make the determination on its own of who is an innocent spouse.
Courts have supported the IRS policy of targeting either spouse for a balance that is due. Spouses, even if both agree, may not insist that the IRS first try to collect from one spouse before going after the assets of the other.

Independent Contractor Reclassification Audit

April 23, 2026January 15, 2014 by Brotman Law

The Employment Development Department in California has been particularly aggressive in the area of independent contractor reclassification audits. In the eyes of the Employment Development Department, California businesses have been abusing the system by treating workers who should be classified as employees as independent contractors. In doing so they shift the burden for payroll taxes onto the worker and avoid their own contributions to the payroll tax and unemployment insurance system. As a result, the Employment Development Department has been particularly vigilant in auditing businesses for perceived abused of the system. Often these independent contractor reclassification audits can be costly for businesses.

Key Takeaways

The Employment Development Department in California has been particularly aggressive in the area of independent contractor reclassification audits.
Employment Development Department independent contractor reclassification audits are potentially costly for businesses.
Many businesses make serious mistakes during an independent contractor reclassification audits. First, they assume that having an independent contractor agreement will protect them in the audit. This categorically false.

How to Prevent Corporate Fraud

April 23, 2026January 11, 2014 by Brotman Law

This is the fourth part in my series discussing corporate fraud. For more on this topic please read

Key Takeaways

This is the fourth part in my series discussing corporate fraud.
Ultimately, all institutions should have a comprehensive fraud prevention program tailored to meet the needs of the organization. Fraud prevention programs should also include three prongs to make them healthy enough to deter fraud.
Whistleblower protections and training programs are another way to accomplish this task. Setting up a successful hotline and encouraging employees to speak out when they see or think they have discovered tool can serve as a valuable deterrent.

Types of Fraud

April 23, 2026January 11, 2014 by Brotman Law

However, financial statement manipulation is simply on the edge of the fraud landscape. Much more common are asset misappropriations. The three basic types of asset misappropriations are skimming, larceny and fraudulent disbursements. Skimming and larceny occur when cash is taken directly from the employer, the difference between the two being that skimming occurs before the cash has a chance to be reported. Fraudulent disbursements are a way of scamming the corporation into giving the fraudster payments. Fraudulent disbursements are one of the more popular method of fraud and are implemented in a number of different ways. False billing and payroll schemes are the most common according to the text. Shell companies or ghost employees are often used to make the organization distribute payment with minimal expose outside of the immediate system. In more some of the more complicated cases, corruption in all forms is prevalent. Bid rigging, kickbacks and bribes are all forms that corruption can flourish in the corporate environment. The best way to combat this is through a combination of increased security measures working in conjunction with one another to best prevent organization fraud. While the two organizations should have some overlap and maybe some shared responsibility, one is not a substitute for the other. Both are critical to maintaining the proper level of internal controls necessary to prevent fraud

Key Takeaways

However, financial statement manipulation is simply on the edge of the fraud landscape. Much more common are asset misappropriations. The three basic types of asset misappropriations are skimming, larceny and fraudulent disbursements.
External fraud is also an increasing threat to corporate security and stability. External fraud can include pyramid or ponzi schemes, credit card fraud, and information or security fraud.
In addition to credit card fraud, information security is becoming more prevalent as well. Many businesses do not have efficiently run IT security or have strong policies implemented to deter both internal and external attacked.

Government Response to Corporate Fraud

April 23, 2026January 11, 2014 by Brotman Law

I next want to discuss the history of the governmental response and the more noteworthy commentary on corporate culture in the last thirty years. Although measures to prevent corporate crime were in effect before the 1980s, one of the more sufficient events was the formation of COSO in 1985. COSO is the Committee of Sponsoring Organizations, a volunteer group formed by the major accounting, finance, and other professional organizations. The committee reviewed instances of fraud and made key recommendations to improve reporting and internal controls. Among these were having an audit committee composed entirely of independent directors, developing a written code of ethics, and recommending that the SEC have new power to bar or suspend those involved in fraudulent financial statement reporting. In addition, COSO established a framework for an effective internal control program, which has become the standard framework for many companies in the United States. The authors next detail the Sarbanes-Oxley Act of 2002, which created the Public Company Accounting Oversight Board and established other procedures and safeguards. Sarbanes-Oxley vastly increased the requirements and protocols for publicly traded companies, as well as creating new laws in the areas of securities fraud, white-collar crime, and whistleblower protection.

Key Takeaways

I next want to discuss the history of the governmental response and the more noteworthy commentary on corporate culture in the last thirty years.
After an overview of public and governmental response to fraud, I want to next discuss the subject of internal controls. A successful antifraud program should contain several key elements.
There are many different types of fraud, many of which are prevalent in the workplace. First there is financial statement fraud, which can be deadly to a company both financially and reputationally.