LEVINE, KATZ, NANNIS + SOLOMON, P.C.

The Office of the Comptroller of the Currency (OCC) has issued an alert to banks, asking them to warn their customers about a new fraud scheme that uses fictitious IRS forms and bank correspondence.

Under the scheme, bank customers receive a letter outlining the procedures that need to be followed to protect the recipient from unnecessary withholding taxes on their bank accounts and other financial dealings. The letter instructs the recipient to fill in the enclosed IRS Form W-9095 and return it within seven days. According to the letter, anyone who doesn't file the form is subject to 31% withholding on interest paid to them. A fax number is provided for the recipient's convenience.

The IRS form is, of course, bogus and is just another attempt at identity theft. Anyone who has filled in the form should contact the fraud department of each of the three major credit bureaus and report that their identity has been stolen. Telephone numbers and addresses are provided in the alert, along with additional advice to follow in case your account has been fraudulently accessed or opened. The OCC's advice includes filing a report with the local police department and contacting the IRS's hotline (1-800-829-0433).

Additional information about identity theft is available from the Web sites of the OCC and Federal Trade Commission (FTC).

FBI Identifies Most Common & Costly Internet Scams

The Federal Bureau of Investigation (FBI) and the National White Collar Crime Center have issued a report on the complaints filed during calendar year 2001, the first full year of operations for the Internet Fraud Complaint Center (IFCC). The report identifies the most common and costly types of Internet fraud and includes a list of best practices to prevent these types of fraud.

Altogether, the IFCC received nearly 50,000 complaints in 2001. Most (75%) of the alleged fraud perpetrators were individuals, and the vast majority (90%) of complainants were individuals (rather than businesses). But, the report explains, these results are not necessarily a fair sample of all Internet frauds because the IFCC is not yet fully equipped to handle business complaints. The expectation is that businesses will make up a larger proportion of Internet fraud complainants in the future.

Not all complaints received by IFCC involved monetary losses. Of those that did, the percentages and median costs for the most common types of Internet fraud were as follows:

1. Auction fraud, 42.8%, $395

2. Non-delivery of merchandise and payment, 20.3%, $325

3. Nigerian letter fraud, 15.5%, $5,575

4. Credit-debit card fraud, 9.4%, $450

5. Confidence fraud, 3.1%, $585

6. Investment fraud, 1.7%, $1,000

7. Business fraud, 1.4%, $160

8. Identity fraud, 1.3%, $3,000

9. Check fraud, 0.7%, $910

10. Communications fraud, 0.6%, $200

Complaints are forwarded to the appropriate government agencies for handling, even if the complaints fall outside the IFCC's area of focus. Allegations of computer intrusions go to the National Infrastructure Protection Center (NIPC), complaints about e-mail spam and identity theft go to the Federal Trade Commission (FTC), and the IFCC works with the U.S. Secret Service on complaints involving credit card fraud or Nigerian letter scams. In addition, following the events of September 11, 2001, the IFCC web site was designated by the U.S. Attorney General as the single on-line portal for the public to report terrorist information.

Download the report. File a complaint. Learn more about the National White Collar Crime Center (NW3C).

The IRS announced last week that beginning with tax year 2002, companies with less than $250,000 in gross receipts and less than $250,000 in assets can bypass filling out the Schedules L, M-1, and M-2 on their corporate income tax returns. Corporations who file Form 1120-A and who are under the $250,000 threshold no longer have to prepare Parts III and IV of their 1120-A.

The immediate result of this ruling will be a significant reduction in record-keeping and paperwork for small businesses. Many small businesses will no longer need to struggle to learn accounting rules. Instead they will be able to prepare their annual income tax return forms by using record keeping based on the information in their company checkbooks. According to an IRS news release on the new ruling, small businesses typically only prepare balance sheets based on the company's books because they are required to do so for tax purposes.

IRS Commissioner Charles O. Rossotti spoke favorably of the ruling: "These changes could save 2.6 million small businesses an estimated 61 million staff hours. This is staff time now spent preparing these forms. These changes will mean a significant financial savings for small businesses."

Many members of Congress also spoke glowingly of the new ruling. Senator John Kerry of Massachusetts, chairman of the Senate Small Business and Entrepreneurship Committee, referred to the ruling as one that will "benefit all Americans." Congresswoman Nydia Velazquez, D-NY, spoke of the "time wasted on paperwork" by small businesses that are required to fill out the tax forms. Congressman Don Manqullo of Illinois, chairman of the House Small Business Committee, referred to the "countless hours and endless amounts of money [spent by small businesses on] figuring their tax returns."

Many companies are disclosing more information in their 2001 annual reports as a result of added investor pressures following the collapse of Enron. But some professional investors and analysts seem to be shying away from this trend based on their approaches to forensic accounting and the footnote factor.

Wall Streeter's see forensic accounting as a way to dig through ever more complicated and voluminous financial reports and make an assessment of the quality of a company's earnings. Simplistic as it may sound, the media report that the footnote factor is an increasingly popular way to quickly size up the quality of a company's earnings this year.

Simply stated, the footnote factor approach says a lot of the good stuff is revealed in footnotes, but if there are too many of them, watch out. "If there's 10 or 15 pages of footnotes, move on," explains John Montgomery of Montgomery Brothers, a money management firm with offices in New York and Washington. "There's too much potential for bad things in there."

Examples of troublesome footnotes include those about off-balance sheet arrangements and related party transactions and those that deal with changes in debt structure. One certified financial analyst says she scans 10Ks for the fine print on whether a company has violated the terms of its debt covenant, or has been hit with tougher credit restrictions, such as higher rates or a larger collateral requirement.

Only one other part of annual reports contains information as telling as the footnotes, say the money mangers, and that is the risk disclosure segment of a 10K. James Delisle, head of Boston research boutique Independent Perspectives says this section is usually a mind-numbing litany of vague statements about potential risks facing the company, but it can also be a treasure trove of warnings for investors who are willing to dig beyond the boilerplate language.

On April 18, 2002, the Senate Finance Committee heard testimony on the tax and accounting treatment of executive stock option compensation. Chairman Max Baucus said the objective of the hearing was to fully explore the issues that surfaced in the wake of Enron, even though some may fall under the jurisdiction of other committees.

A key issue is whether the treatment of stock options is best handled as an accounting question or through the tax code. Senator Carl Levin argued that Congress has the responsibility for adopting a tax code. "We cannot duck it by saying it's an accounting problem," Senator Levin said. He and Senator John McCain have co-sponsored proposed legislation (S. 1940) to link tax benefits from stock option compensation to a requirement that the company include such expenses on its financial statements. His testimony cited examples of some of the problems associated with stock options that have surfaced in recent months.

· Over just the last few months, too many articles to count have described companies where CEO stock option pay has soared despite poor company performance. Global Crossing went bankrupt while its CEO walked away with $730 million in a single year. Oracle Computer stock price dropped 57% in the same year its CEO cashed in stock options for $700 million. Cisco Systems stock price dropped 72% in the same year the company gave its CEO 6 million new options. Other companies repriced options that had lost their value after the stock price dropped, or issued additional options so that executives would benefit even when company stockholders lost.

Proponents of the Levin/McCain bill included Sarah Teslik, executive director of the Council of International Investors, who said executive stock option compensation has become a critical tool that enables corporate fraud. Opponents included John Biggs, CEO of TIAA-CREF and former member of the Public Oversight Board, who said he agrees all types of employee stock options should be expensed in income statements, but he does not think Congress should direct accounting standards through the tax code.

Read the testimony of Ms. Teslik, Mr. Biggs and others at the Senate Finance Committee hearing. Download S. 1940, "Ending the Double Standard for Stock Options Act.""

Computer Virus Alert – Klez Worm Spreads

The latest variant of the Klez worm sometimes chooses to hitch a ride on sensitive documents, resulting in victims' confidential information spreading with the malicious program.

The worm arrives in an e-mail message with one of 120 possible subject lines. Known as Klez.g, Klez.h and Klez.k, depending on the security advisory, the newest version has spread worldwide, sending itself in e-mail messages with infected documents attached.

Most antivirus vendors, including Symantec and McAfee, have offered Klez.H patches since last Wednesday.

"Klez.h poses a special threat: The worm scans the disks of an infected computer and, depending on a set of conditions, attaches a file to each infected e-mail it distributes," stated the advisory.

Text, HTML (Hypertext Markup Language), Adobe Acrobat and Excel files are included in the types of documents that the virus can forward, but other files that the worm could attach--such as JPEG and MPEG files--are less likely to contain important information.

In many circumstances, the worm doesn't need the victim to open it in order to run. Instead, it takes advantage of a 12-month-old vulnerability in Microsoft Outlook, known as the Automatic Execution of Embedded MIME Type bug, to open itself automatically on un-patched versions of Outlook.

The program will also cull e-mail addresses by searching a host of different file types on the infected PC. Using its own mail program, the worm will send itself off to those e-mail addresses. In addition, it will use the addresses to create a fake "From:" field in the e-mail message, disguising the actual source of the e-mail.

The worm also attempts to disable antivirus software by deleting registry keys, stopping running processes and removing virus-definition files.

Finally, the worm drops a second virus on the computer and spreads to other disk drives connected to the PC over an internal network.