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Capital Confirmation Inc.

Capital Confirmation Inc. The world’s leading experts in secure electronic audit confirmations. 214 Centerview Drive, Brentwood, TN 37027 (615) 844-6222 www.confirmation.com. Why Is Bank of America Mandating the CONFIRM Service?. Problems with Paper Confirmations :

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Capital Confirmation Inc.

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  1. Capital Confirmation Inc. The world’s leading experts in secure electronic audit confirmations. 214 Centerview Drive, Brentwood, TN 37027 (615) 844-6222 www.confirmation.com

  2. Why Is Bank of America Mandating the CONFIRM Service? Problems with Paper Confirmations: • Customer complaints on slow response time: Response times averaged 20-44 days last two years • 1/3 of all paper confirmations are reconfirmations • $10 Billion lawsuit against Bank of America as a result of the Parmalat fraud where a forged Bank of America confirmation was not uncovered by the auditors Using CONFIRM, Bank of American Guarantees: • 100% Response Rate • 5 Business Day Turnaround or its Free • Only validated employees who are authorized, knowledgeable and free from bias (as SAS No. 67 requires) will respond

  3. Paper Confirmations Order Paper Forms 1. 4 - 6 week turnaround Order Envelopes 2. 30+ steps 3. 40% lost/error rates 4. $120+ per confirmation Client • Responder not • validated Order/Stocking Clerk Supply Room Bank Clerk Fax Mailroom Mailroom Accounting Firm Accountant Bank Operations 1st Request 2nd Request Fax Request Phone Call Relationship Manager US Post Office Mailroom Assistant Bank Branch

  4. Current Paper Process Can be sent to anyone at any location. Who provides the mailing address? Who validates the mailing address? Open System: Mailed requests can be sent to anyone at any location. Is it the correct department within the responder? Is the signature from the responder? Is the response timely? Do you have the direct contact information for the specific responder?

  5. Solution: Secure Clearinghouse for Audit Confirmations • Responder authenticated by independent third party • Correct department contacted • Client Data Encrypted (128-Bit SSL - Verisign) • Retraceable “Paper” Trail • Timely response • Contact information validated and easily available • Electronic Storage & Real- Time Retrieval

  6. Electronic Confirmations:The CONFIRM™ Service Accountant Bank 1. 4 secure steps 2. 24-48 Hour average turnaround 3. Reduces costs and increases realization 4. Validated electronic responders Audited Company 5. Patented Technology

  7. The CONFIRM Service What CONFIRM Is: • CONFIRM is the secure communication channel through which auditors and banks actively communicate. It is a secure clearing-house for audit confirmations with validated requestors (auditors) and validated responders (banks). • CONFIRM is a delivery channel just like the Post Office, FedEx/UPS, and the Telephone. What CONFIRM Is NOT: • CONFIRM does not replace either the auditor or the bank in the confirmation process • CONFIRM does not pull data from the bank • CONFIRM is not an email/secure email service • CONFIRM is not a data aggregator (i.e. a screen-scraper) • CONFIRM is not the bank’s online banking service

  8. CONFIRM™ CONFIRM™ Launched Summer of 2003 Confirmations Processed 100,000+ Audited Entities 30,000+ private, public, government & not-for-profit Accounting Firm Users Sole Practitioners to Big 4 (50% of the Top 100) Banks (Responders) Top 10 Banks to Local/Community Banks (12 of the Top 15; 60% of the Top 50)

  9. The Results:CONFIRM™ Service

  10. Parmalat: $5 Billion Bank Confirmation Fraud • 10 year fraud by Executive Management • Audited every year • Parmalat acknowledged in a press release dated December 19, 2003, that the assets in its 2002 audited financial statements were overstated by at least €3.95 billion (approximately $4.9 billion) • Auditors certifiedthe 2002 financial statements based upon a false confirmationthat the company held these assets at Bank of America. The bank account and the assets did not exist and the purported confirmation had been forged • Banks lost $2.5 billion in unsecured debt • U.S. investors lost $1.5 billion in bonds • Equity investors lost 96% of their value in one day

  11. Bank of America New York Branch is not an authorized confirmation response center Fax number is from New Jersey not New York Balances started off small and eventually grew to $5+ billion over 10 years Signature is a forgery of someone who is an employee of the bank but not one who is authorized to answer confirmations

  12. Parmalat’s Lawsuits Roll to the Auditors Auditors $10 Billion Each Citigroup $10 Billion Morgan Stanley & Banka Intesa $1.96 Billion UBS $355 Million Deutsche Bank $21 Million Bank of America $10 Billion Shareholder Class Action Billions “Relied on audited financial statements” Result: Will sue the Auditors as well! • “We’re talking about a fraud that could have happened anywhere.” • Umberto Mosetti, Law Professor • The Economist “Parma Splat.” January 15, 2004

  13. Sample of Companies with Staff who Responded Falsely to Audit Confirmations • Ahold Fraud: • Sara Lee Foods - Sales Manager • Conagra Foods – Account Manager • Sara Lee Bakery Group – Sales Manager • Sugar Foods – Vice President of Sales • Koch Poultry – Owner • Heritage Bag – CEO • Citrus World – Corporate Accounts • Manager • Hunt-Wesson Foodservice – Vice President for Business Development Kmart Fraud: • Eastman Kodak - Vice President (Sales) • Coca Cola – National Director of Sales • Pepsi-Cola – National Sales Director • Frito-Lay – Director of Sales • Frito-Lay – National Account Manager Just For Feet Fraud: • Adidas – Director of Apparel Sales • Fila – President & CEO • Converse – Vice President of U.S. Sales Though the mailing addresses were correct, notice that the fraudulent responses came from Sales and Relationship Managers – the auditors never verified that the individual responder was “authorized to respond” and “free from bias” as SAS 67 requires.

  14. Sample of Recent Confirmation Frauds “Fraudsters are the most reliable returners of auditors’ confirmation letters, completed and signed without exception.” - Toby Bishop, CPA, CFE President & CEO Association of Certified Fraud Examiners Washington D.C. September 22, 2004 “To commit fraud, the fraudster needs the confirmation and the client provided documentation to match.Therefore, the true risk of fraud occurs when the confirmations tie-out.” - Brian Fox, CPA Founder of Electronic Confirmations

  15. Common Confirmation Fraud Schemes: Auditor's are at risk because… Client provides… • Account statement and contact information • Address and/or fax number for where to send the confirmation • Contact name for who to send the confirmation to • Phone number of the supposed bank or vendor • Website address of the supposed bank or vendor And… 6. Impractical if not impossible for auditor to validate the authenticity of the signature returned from the bank/vendor Who is the Responder??

  16. 2007 Professional StandardsSupporting & Encouraging Electronic Audit Confirmations • March of 2007: AICPA’s Audit Issues Task Force & Auditing Standards Board Interpretation Number 1 of AU 330 on Electronic Confirmations • “properly controlled electronic communications may be considered to be reliable audit evidence” • June 2007: AICPA’s Practice Issues Task Force Updated Practice Alert 2003-1 Confirmations • “An electronic confirmation process that creates a secure confirmation environment may mitigate the risks of human intervention and misdirection. The key lies in the process or mechanism used by the auditor and the respondent to minimize the possibility that the results will be compromised because of interception, alteration, or fraud with respect to the confirmation.” • September 2007 (as proposed): IAASB Revised ISA 505 External Confirmations • “(A) direct written response to the auditor, whether in paper form, or by electronic or other medium…” • October 2007 – The PCAOB reports that Confirmations are a Top Priority for 2008 • October 2007 – The ASB commissions a Task Force to draft a revision to AU 333 The Confirmation Process based on the work from the IAASB and PCAOB

  17. Key Benefits of using CONFIRM™ Service • 100% Response Rate • 2 Business Day Average Turnaround • 15 Minute Online Self-Training • Manage 100% of Your Bank Confirmations for ALL Banks • Saves Up to 50% of Your Staff Time in Confirmation Area • Improves Fraud Detection • Go GREEN!

  18. Accounting Firm Benefitsusing CONFIRM™ Service

  19. Accounting Firm Comments “I have absolutely no complaints!” – Manager “We’re very pleased with the solution. Using it, we’ve cut our time spent doing confirmations in half.” - Managing Partner “efficient way of doing a process we have to do that takes professional time.” – Managing Partner “It saves time” – Partner “excellent product that is really needed in the present audit environment.” – Partner “It has worked great” - Manager

  20. Capital Confirmation Inc.Thank you. www.confirmation.com

  21. McKesson & Robbins 1920’s Quotes from Fortune Magazine March 1940 Fall and Rise of McKesson & Robbins • When an auditor looks into your books, his interest is in figures and documents only (not fraud). Take the verification of assets. For the cash item, he writes your bank to see how much cash you have, and reconciles that with your own deposit records and canceled checks. • (Management) maintained real mailing addresses in Montreal and Liverpool for Price, Waterhouse’s sake. • The offices in Montreal had a full-time secretary each. • Instructions were to forward all mail to management. • The mail consisted chiefly of a semiannual letter from Price, Waterhouse, asking for confirmation of balances and inventories. • By an ironic coincidence, the office of Price, Waterhouse was less than a block away. But if accountants seem easy to fool… Confirmation procedures haven’t changed in over 80 years! And the frauds can still happen the same way!

  22. CONFIRMATION FRAUD CASE STUDYCF Foods: Private Company CF Foods Sales Reported 1994 $8,699,152 1995 $19,026,265 1996 $40,590,990 1997 $83,985,013 1998 $142,990,010 Total $295,291,430 • David Burry general partner CF Foods • Promised returns of 18-30% • Paid early investors with investments from later investors • $25 million in investments • Used “white out”, typed in new information, and photocopied forged records to look authentic • Hundreds of fictitious transactions • Told customers the confirmation requests were sent out by mistake and to return them to Burry, who confirmed the false balances 97% of these sales never actually occurred!!

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