As 2007 draws to a close, a few end-year thoughts about fraud come to mind...
* Fraud against corporations, non-profit organizations, public sector agencies and other institutions did not diminish in 2007. Though the full-year data aren't in yet, I suspect that this may be a gross understatement. We at White-Collar Crime Fighter and FraudAware visited with literally hundreds of senior corporate managers responsible in one form or another for protecting their orgazations against fraud. Though very few are able (or willing) to tell how much their organiztaions lose to fraud these days, we encountered NO ONE who claimed that fraud was either not a problem or was on a decline.
• The evidence of the worsening threat of fraud is having an interesting effect on senior managers. Five years-plus since the enactment of Sarbanes-Oxley, more and more internal audit chiefs, CFO's, in-house attorneys and even COO's and CFO's are wondering why fraud continues to plague their organizations. We don't have all the answers, but we continue to search for them. Some of the smartest and most experienced fraud-fighting folks in the "biz" tell us that mere compliance with SOX just isn't enough to make a dent in fraud. Reason: SOX controls are only as effective in preventing fraud as management wants them to be. If the culture of the organization defines SOX and other regulatory compliance as a huge pain in the a--, employees throughout the organization will have no incentive to support the company's anti-fraud efforts by ensuring that controls actually work.
• Which brings me to the thorny issue of fraud awareness. More and more respectable fraud prevention gurus, including many in the forensic practices of large and medium-sized accounting firm consulting arms as well as corporate CFE's are acknowledging that the "human" side of fraud prevention has been long overlooked. It's time to recruit EVERYONE in the organiation to help fight fraud. But that only works if employees at all levels in all departments in all geographical locations know how to detect and REPORT economic crime. Though management has a tendency to consider the cost of awareness training an avoidable expense rather than an investment in enterprise-wide fraud deterrence, prevention and detection, this attitude is beginning to shift. As we learned from our travels among corporate internal audit departments, internal legal departments, senior financial departments and more, recruiting employees to act as the "eyes and ears" of the organization is becoming an increasingly appealing new strategy for fighting fraud.
• We believe that 2008 will see a stepped-up shift toward this proactive approach to defending organiztaions against all forms of internal, external and cyber-frauds. This is a very good thing. Experience and statistics prove that once the culture embraces the concept of assigning fraud-fighting responsibility to EVERYONE in the organization, hotline calls spike, enabling auditors and others to initiate investigations BEFORE massive amounts of money are stolen or unpleasant headlines hit the newsstands. This attitude also imbues the organization with a built-in deterrent... with company-wide awareness creating a constant yet subtle sense among employees that getting away with fraud won't be easy.
We look forward to serving the fraud-fighting community with the carefully-selected, authoritative insights and advice we publish in White-Collar Crime Fighter... and by helping more and more companies implement high-impact and affordable fraud awareness training programs--through in-house workshops, or with our unique, proprietary E-Learning awareness course...or with a combination of both.
We wish all a fulfilling, prosperous and fraud-free 2008!
--Peter Goldmann
President
White-Collar Crime Fighter
Ridgefield, CT, Dec. 24, 2007
Monday, December 24, 2007
Sunday, December 10, 2006
What Part of "Background Check" Do We Still Not Understand?
It continues to amaze me--after all these years of corporations being implored to check the criminal backgrounds of prospective employees (especially ones handling your money)--that the following tragedies still occur...
From Bloomington, IL:
Not once, but twice had Heather Ferguson been convicted of stealing from two different employers before getting caught having embezzled $41,000 from her latest employer, Dekeyser Express Inc., of Normal, IL. According to the Illinois State’s Attorney’s Office, Ferguson worked as an accounting clerk for Dekeyser when she made more than company 70 checks payable to herself.
Ferguson was fired Sept. 18—about one year after she began working at the company.
Problem: At the time, according to state officials, Ferguson was on probation on a 2005 theft case in Sangamon County in which she was convicted of stealing about $3,600 from another company. And she also had on her record a 2004 conviction for embezzling $2,000 from a third company.
Lesson for all: A $50-$100 criminal background check of prospective employees is well worth the investment.
From Bloomington, IL:
Not once, but twice had Heather Ferguson been convicted of stealing from two different employers before getting caught having embezzled $41,000 from her latest employer, Dekeyser Express Inc., of Normal, IL. According to the Illinois State’s Attorney’s Office, Ferguson worked as an accounting clerk for Dekeyser when she made more than company 70 checks payable to herself.
Ferguson was fired Sept. 18—about one year after she began working at the company.
Problem: At the time, according to state officials, Ferguson was on probation on a 2005 theft case in Sangamon County in which she was convicted of stealing about $3,600 from another company. And she also had on her record a 2004 conviction for embezzling $2,000 from a third company.
Lesson for all: A $50-$100 criminal background check of prospective employees is well worth the investment.
Monday, December 4, 2006
Why We Need SOX: One Auditor's Nightmare
Section 806 of the Sarbanes-Oxley Act, in unambiguous wording, protects employees of public companies who report suspected financial wrongdoing by their employers against any form of harassment, discrimination, threat or dismissal. Yet, more than 800 whistleblower complaints have been filed with the federal government since SOX was enacted in July 2002.
One case in particular could prove to be a landmark. In October 2002, David Welch, then chief financial officer of Cardinal Bankshares of Floyd, VA, was fired, ostensibly for “insubordination” in connection with his refusal to participate in a meeting to discuss alleged financial irregularities with the bank’s audit committee and attorney without his own personal attorney present.
The real reason: Dave Welch reported several instances of suspected accounting impropriety to the bank’s CEO, R. Leon Moore, who disputed or ignored Welch’s notices.
Specifics: Welch reported incidents of improper journal entries regarding the bank’s recovery of previously written-off loans, thereby inflating reported income for at least one quarter of 2001. He also told Moore about problems with other financial reports…and warned Moore about potentially unlawful insider trades in Cardinal shares.
Result: When Welch was denied his request to have his attorney present at the meeting to review these allegations,he was declared insubordinate and promptly fired. Additionally, he was deemed incompetent in his job as CFO, despite the fact that he had been awarded substantial salary increases during the time he worked there.
Two months later he filed a complaint with the US Department of Labor’s (DOL) Occupational Safety and Health Administration (OSHA),alleging violation of SOX’s whistleblower protection provision.
A LEGAL QUAGMIRE
What has occurred since would cause even the most seasoned labor attorneys’ heads to spin. No fewer than 10 rulings by federal agencies and courts have been handed down, most supporting DOL’s initial ruling to reinstate Welch and compensate
him with back pay. That gave Welch the dubious distinction of being the first whistleblower to win a DOL decision ordering reinstatement under the terms of Sarbanes-Oxley. Unfortunately, after four years,Welch’s case remains unresolved.
Reason: Cardinal has challenged the initial and subsequent rulings ordering Welch’s reinstatement, invoking various legal technicalities, and has thus caused the legal process to drag on for more than four years. In the process,Welch has incurred nearly $250,000 in legal fees. The bank’s adamancy is particularly odd in light of the fact that its homepage on the Web offers visitors little more than the following text: “It is the policy of Cardinal Bankshares Corporation…to comply with all applicable laws and regulations and to be governed by the highest level of business ethics. Therefore, all those associated with the Company are encouraged to report any concern they might have relating to poten-tial fraud, improper accounting principles, ineffective auditing procedures or similar financial issues to their supervisor, the internal auditor, the audit committee or appropriate authorities (whistle blowing).
The Company also encourages anyone to report any pressure applied to them to commit any such acts. The law precludes
any acts of reprisal or threats due to expressions of concern.”
KEY MILESTONES
Meanwhile, Dave Welch’s case drags on.Key milestones in the litigation…
• Starting in August 2002,Welch made it clear to Moore and other senior managers that he would not be able to sign the new certifications required by Sarbanes-Oxley related to financial reports filed with the SEC because he felt that material inaccuracies due to accounting irregularities were contained in the report and he was concerned about violating the new SOX
reporting rules. (Welch had alreadyreported his concerns to the SEC in March 2002, but there has been no SEC
response.)
• On September 17, 2002, Cardinal’s outside auditor submitted a report to management addressing the alleged irregularities. The report concluded with an assessment that Welch was “unwilling or unable to function effectively as [CFO] of this Company and to fulfill his fiduciary obligations to the Company and its shareholders.” It then recommended that Welch be terminated. On September 25, 2002, Welch was suspended and a week later, on October 1, 2002, he was terminated.
• On January 28, 2004, Administrative Law Judge (ALJ) Stephen Purcell at DOL issued a 72-page “preliminary ruling”
ordering Welch’s reinstatement at Cardinal Bankshares.The ruling meticulously recounted the details of Welch’s dispute with Moore and the audit committee over the allegations of accounting irregularities and of the circumstances of Welch’s dismissal for insubordination. In addition, Judge Purcell’s ruling carefully summarized testimony from senior management, external auditor Mike Larrowe and Kyle Venson Bolt, a local septuagenarian farmer who was chairman of the audit committee and vice-chairman of the bank’s board of directors at the time of Welch’s termination.
Ruling: Welch had adequately satisfied Sarbanes-Oxley’s whistleblower provisions requiring that he bear the burden of proof in reporting incidents of fraud or suspected financial wrongdoing, and that his act of reporting qualified
as “protected” activity under SOX. Collectively, Purcell ruled that the evidence entitled Welch to reinstatement and to damages.
• Cardinal appealed the Purcell ruling which touched off a legal volleyball match that continues to this day.
WHY IS THE BANK PERSISTING?
Officially, Cardinal Bankshares claims that Welch’s allegations of accounting irregularities are unfounded and that this is why it has fought Welch’s complaint for so long. Moreover, Cardinal’s CEO, Leon Moore, toldWhite-Collar Crime Fighter that a major reason for pursuing the case so aggressively is that the bank “has integrity backing it up” and
that “We refuse to be bullied into paying people off when they demand it.”He elaborated by claiming that Welch
demanded substantial compensation in exchange for his resignation for refusing to certify the bank’s financial statements in 2002—something Welch adamantly denies.
Theories abound as to the real reason for such a small bank’s dogged defense against Welch, including the possibility that additional financial improprieties could be discovered and reported…and that its legal strategy is to simply exhaust Welch’s financial resources and ultimately have the case dismissed.
No doubt, there is also an element of personal motivation on CEO Moore’s part. It is clear that he developed a strong dislike for Welch not long after Welch was hired…and that the termination and subsequent rejection of Welch’s allegations of SOX violations may be at least to some degree rooted in this animosity.
Despite its appearance as petty corporate infighting among executives of a tiny bank, SOX attorneys, regulators and corporate management will inevitably be affected by the conclusion of this case. If Welch loses his bid for reinstatement, it
will represent a serious blow to the viability of SOX’s whistleblower protections and could inhibit employees throughout US business from coming forward with reports of financial fraud.
By contrast, should Welch ultimately prevail, it would demonstrate that SOX’s whistleblower provision “has teeth”…and it could very well cause managers to think twice before retaliating against employees who expose financial wrongdoing by their
employers.
White-Collar Crime Fighter sources:
• David Welch, former chief financial officer, Cardinal Bankshares Corp.
• R. Leon Welch, Chairman and CEO, Cardinal Bankshares Corp.
• Joe Rainsbury, Esq., LeClair Ryan, Roanoke, attorney for Cardinal Bankshares Corporation.
• D. Bruce Shine, Esq., Shine & Mason Law Office, attorney for David Welch.
• Documents in the cases of David E.Welch v. Cardinal Bankshares Corp. at the US Department of Labor, Office of Administrative Law Judges and the US District Court,Western District of Virginia, Roanoke,VA.
One case in particular could prove to be a landmark. In October 2002, David Welch, then chief financial officer of Cardinal Bankshares of Floyd, VA, was fired, ostensibly for “insubordination” in connection with his refusal to participate in a meeting to discuss alleged financial irregularities with the bank’s audit committee and attorney without his own personal attorney present.
The real reason: Dave Welch reported several instances of suspected accounting impropriety to the bank’s CEO, R. Leon Moore, who disputed or ignored Welch’s notices.
Specifics: Welch reported incidents of improper journal entries regarding the bank’s recovery of previously written-off loans, thereby inflating reported income for at least one quarter of 2001. He also told Moore about problems with other financial reports…and warned Moore about potentially unlawful insider trades in Cardinal shares.
Result: When Welch was denied his request to have his attorney present at the meeting to review these allegations,he was declared insubordinate and promptly fired. Additionally, he was deemed incompetent in his job as CFO, despite the fact that he had been awarded substantial salary increases during the time he worked there.
Two months later he filed a complaint with the US Department of Labor’s (DOL) Occupational Safety and Health Administration (OSHA),alleging violation of SOX’s whistleblower protection provision.
A LEGAL QUAGMIRE
What has occurred since would cause even the most seasoned labor attorneys’ heads to spin. No fewer than 10 rulings by federal agencies and courts have been handed down, most supporting DOL’s initial ruling to reinstate Welch and compensate
him with back pay. That gave Welch the dubious distinction of being the first whistleblower to win a DOL decision ordering reinstatement under the terms of Sarbanes-Oxley. Unfortunately, after four years,Welch’s case remains unresolved.
Reason: Cardinal has challenged the initial and subsequent rulings ordering Welch’s reinstatement, invoking various legal technicalities, and has thus caused the legal process to drag on for more than four years. In the process,Welch has incurred nearly $250,000 in legal fees. The bank’s adamancy is particularly odd in light of the fact that its homepage on the Web offers visitors little more than the following text: “It is the policy of Cardinal Bankshares Corporation…to comply with all applicable laws and regulations and to be governed by the highest level of business ethics. Therefore, all those associated with the Company are encouraged to report any concern they might have relating to poten-tial fraud, improper accounting principles, ineffective auditing procedures or similar financial issues to their supervisor, the internal auditor, the audit committee or appropriate authorities (whistle blowing).
The Company also encourages anyone to report any pressure applied to them to commit any such acts. The law precludes
any acts of reprisal or threats due to expressions of concern.”
KEY MILESTONES
Meanwhile, Dave Welch’s case drags on.Key milestones in the litigation…
• Starting in August 2002,Welch made it clear to Moore and other senior managers that he would not be able to sign the new certifications required by Sarbanes-Oxley related to financial reports filed with the SEC because he felt that material inaccuracies due to accounting irregularities were contained in the report and he was concerned about violating the new SOX
reporting rules. (Welch had alreadyreported his concerns to the SEC in March 2002, but there has been no SEC
response.)
• On September 17, 2002, Cardinal’s outside auditor submitted a report to management addressing the alleged irregularities. The report concluded with an assessment that Welch was “unwilling or unable to function effectively as [CFO] of this Company and to fulfill his fiduciary obligations to the Company and its shareholders.” It then recommended that Welch be terminated. On September 25, 2002, Welch was suspended and a week later, on October 1, 2002, he was terminated.
• On January 28, 2004, Administrative Law Judge (ALJ) Stephen Purcell at DOL issued a 72-page “preliminary ruling”
ordering Welch’s reinstatement at Cardinal Bankshares.The ruling meticulously recounted the details of Welch’s dispute with Moore and the audit committee over the allegations of accounting irregularities and of the circumstances of Welch’s dismissal for insubordination. In addition, Judge Purcell’s ruling carefully summarized testimony from senior management, external auditor Mike Larrowe and Kyle Venson Bolt, a local septuagenarian farmer who was chairman of the audit committee and vice-chairman of the bank’s board of directors at the time of Welch’s termination.
Ruling: Welch had adequately satisfied Sarbanes-Oxley’s whistleblower provisions requiring that he bear the burden of proof in reporting incidents of fraud or suspected financial wrongdoing, and that his act of reporting qualified
as “protected” activity under SOX. Collectively, Purcell ruled that the evidence entitled Welch to reinstatement and to damages.
• Cardinal appealed the Purcell ruling which touched off a legal volleyball match that continues to this day.
WHY IS THE BANK PERSISTING?
Officially, Cardinal Bankshares claims that Welch’s allegations of accounting irregularities are unfounded and that this is why it has fought Welch’s complaint for so long. Moreover, Cardinal’s CEO, Leon Moore, toldWhite-Collar Crime Fighter that a major reason for pursuing the case so aggressively is that the bank “has integrity backing it up” and
that “We refuse to be bullied into paying people off when they demand it.”He elaborated by claiming that Welch
demanded substantial compensation in exchange for his resignation for refusing to certify the bank’s financial statements in 2002—something Welch adamantly denies.
Theories abound as to the real reason for such a small bank’s dogged defense against Welch, including the possibility that additional financial improprieties could be discovered and reported…and that its legal strategy is to simply exhaust Welch’s financial resources and ultimately have the case dismissed.
No doubt, there is also an element of personal motivation on CEO Moore’s part. It is clear that he developed a strong dislike for Welch not long after Welch was hired…and that the termination and subsequent rejection of Welch’s allegations of SOX violations may be at least to some degree rooted in this animosity.
Despite its appearance as petty corporate infighting among executives of a tiny bank, SOX attorneys, regulators and corporate management will inevitably be affected by the conclusion of this case. If Welch loses his bid for reinstatement, it
will represent a serious blow to the viability of SOX’s whistleblower protections and could inhibit employees throughout US business from coming forward with reports of financial fraud.
By contrast, should Welch ultimately prevail, it would demonstrate that SOX’s whistleblower provision “has teeth”…and it could very well cause managers to think twice before retaliating against employees who expose financial wrongdoing by their
employers.
White-Collar Crime Fighter sources:
• David Welch, former chief financial officer, Cardinal Bankshares Corp.
• R. Leon Welch, Chairman and CEO, Cardinal Bankshares Corp.
• Joe Rainsbury, Esq., LeClair Ryan, Roanoke, attorney for Cardinal Bankshares Corporation.
• D. Bruce Shine, Esq., Shine & Mason Law Office, attorney for David Welch.
• Documents in the cases of David E.Welch v. Cardinal Bankshares Corp. at the US Department of Labor, Office of Administrative Law Judges and the US District Court,Western District of Virginia, Roanoke,VA.
Saturday, December 2, 2006
From "Internal Auditor", December, 2006
To read my column on the trouble with corporate ethics policies, click on the image below...
Friday, December 1, 2006
Corporate Integrity's Rebound Blindsided
The early-November release by the chief executives of the accounting profession, followed by yesterday's announcement of the report by the "blue ribbon" Comittee on Capital Markets Regulation could easily qualify as a rare perfect storm for conspiracy theorists. Coming in the midst of election season, the dual assault on the regulatory status quo regarding corporate governance would seem to represent more than a coincidence.
The "Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks", released in Paris by the "Big Four Plus Two"--Ernst & Young, PwC, KPMG, Deloitte, BDO Seidman and Grant Thornton--makes an unambiguous appeal for immunity from legal (or any other) repercussions that might result from failure to detect fraud while conducting audits of their clients' financial statements. Worse, the accounting profession's elite propose that clients pay a premium "if they want" their books "policed" for fraud.
One can't help wondering if the Fortune 500 clients of these audit behemoths wouln't instigate a regulatory riot at any legislative effort to add a single dollar to the multi-millions in billings that they've been forced to cough up for services rendered to comply with Section 404 of SOX.
The "Vision" from the Big-Audit CEO's urges confrontation of the "expectations gap" regarding what the audit profession can reasonably be expected to find in the way of corporate fraud...and what it can't. But who gets to decide the definition of "reasonble" here? If, as the accounting profession presumably would prefer, we regress to the pre-Sarbanes standard of "reasonable"--i.e. practically NO responsibility for auditing for fraud--then the past four years of "De-Enronization" of corporate governance has been a mammoth waste of time and money.
Similarly, the Committe on Capital Markets Regulation's 150-page report echoing the call for limitations on audit firms' liability and for drastic restrictions on states' freedom to prosecute corporate fraud (among other half-baked, but self-serving "recommendations" for regulatory reform) adds further hypocrisy to the widening debate about whether or not to dismantle or at least dilute SOX. If the elite group of authors of these two reports consider themselves in any way leaders in the post-Enron campaign to restore domestic and international confidence in the integrity of US financial markets, then why are they advocating so vociforously for an easing of the controls that were created to prevent, deter and detect financial crimes such as those that have captured so much media "real estate" in the past several years?
It is unfortunate, though unsurprising, that the Big-Audit CEO's report makes scant mention of the financial burden of complying with SOX 404, but focuses its "recommendations" on easing up on the liability issue, while the Committe on Capital Markets Regulation's includes the liability issue among a host of regulatory "reforms" whose collective repercussions would undoubtedly include reduced protection of investor interests and renewed risk of the type of scandal that spawned this historic rethinking of our country's position on the regulation of corporate conduct.
The "Global Capital Markets and the Global Economy: A Vision From the CEOs of the International Audit Networks", released in Paris by the "Big Four Plus Two"--Ernst & Young, PwC, KPMG, Deloitte, BDO Seidman and Grant Thornton--makes an unambiguous appeal for immunity from legal (or any other) repercussions that might result from failure to detect fraud while conducting audits of their clients' financial statements. Worse, the accounting profession's elite propose that clients pay a premium "if they want" their books "policed" for fraud.
One can't help wondering if the Fortune 500 clients of these audit behemoths wouln't instigate a regulatory riot at any legislative effort to add a single dollar to the multi-millions in billings that they've been forced to cough up for services rendered to comply with Section 404 of SOX.
The "Vision" from the Big-Audit CEO's urges confrontation of the "expectations gap" regarding what the audit profession can reasonably be expected to find in the way of corporate fraud...and what it can't. But who gets to decide the definition of "reasonble" here? If, as the accounting profession presumably would prefer, we regress to the pre-Sarbanes standard of "reasonable"--i.e. practically NO responsibility for auditing for fraud--then the past four years of "De-Enronization" of corporate governance has been a mammoth waste of time and money.
Similarly, the Committe on Capital Markets Regulation's 150-page report echoing the call for limitations on audit firms' liability and for drastic restrictions on states' freedom to prosecute corporate fraud (among other half-baked, but self-serving "recommendations" for regulatory reform) adds further hypocrisy to the widening debate about whether or not to dismantle or at least dilute SOX. If the elite group of authors of these two reports consider themselves in any way leaders in the post-Enron campaign to restore domestic and international confidence in the integrity of US financial markets, then why are they advocating so vociforously for an easing of the controls that were created to prevent, deter and detect financial crimes such as those that have captured so much media "real estate" in the past several years?
It is unfortunate, though unsurprising, that the Big-Audit CEO's report makes scant mention of the financial burden of complying with SOX 404, but focuses its "recommendations" on easing up on the liability issue, while the Committe on Capital Markets Regulation's includes the liability issue among a host of regulatory "reforms" whose collective repercussions would undoubtedly include reduced protection of investor interests and renewed risk of the type of scandal that spawned this historic rethinking of our country's position on the regulation of corporate conduct.
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