Tag Archives: tone at the top

On the Record

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I first wrote about Scott London in April 2013, soon after he had been arrested on insider trading charges. He was sentenced to 14 months in prison and was released early, for good behavior, earlier this year. I was listening to my regular Planet Money podcast last week and, like an awesome Christmas gift, they were interviewing Scott London about what he did and why he did it.

London spoke about how, when he was an audit partner at KPMG, he started sharing non-public information on his clients with a golfing buddy. It is not as though London did not know that what he was doing was both unethical and illegal. He speaks about how much training KPMG gave to employees, training that he himself gave at times. Yet, when his friend’s business was struggling and his friend asked for just a little help, Scott London was able to rationalize what he did. In his mind, the money that Bryan Shaw, the friend, was making was small and this made what he was doing not so bad. This is something that happens often in fraud stories. Most frauds start small, either because the fraudster is testing the waters or because the fraudster initially intends to just take a little to cover their perceived need. It is generally because the initial idea of a fraud is small so it does not seem like a big deal and will not hurt anyone. it is a good reminder that when you are looking into or for fraud, you should not just look for large amounts. The fraudsters are going to do what they can to stay under the radar and many are going to be committing in ways that minimize, in their minds, what they are doing.

All in all, Shaw paid London about $70,000 in cash and gifts, while Shaw made $1.27 million from the insider trading. I was amused to hear London’s shock at how much money Shaw made trading on the information that he got from London. You see, when Shaw asked for the tips, he proposed that they share the money equally. It was funny that London was shocked to find out that the person who had partnered with him in an illegal pursuit had been less than honest with him. I suppose he had not heard that there is no honor among thieves. I am not sure if he was surprised because he realized how much more money he should have been paid or if he thinks he would have nipped the insider trading in the bud had he known just how much money was at stake (making the crime a bigger deal than he imagined).

During the podcast, the Planet Money folk discussed whether insider trading is a victimless crime. They struggled to find who is hurt by the trading. They came to their conclusions about who is hurt and you can also read various others opine. When I look at insider trading and think about who can be seen as victims, I have a long list. If you are competing in what you believe is a level playing field but where some parties know more than you do, it is just about a given that those parties are going to beat you every time. And, in this day and age where many retirement and savings plans involve trading on the stock market, why would you even bother if you knew that there were people making lots of money, primarily because they had inside information that you were not privy to?

There are so many layers in the Scott London story that could fill a book and, one such book, by James Ulvog, about Scott London’s fraud is well worth a read. Hearing from Scott London himself was a great gift and is a lesson in insider trading, tone at the top, how easily a fraud can begin and the consequences of taking the path that he took. Thank you Santa and Planet Money!

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Who Runs Things?

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James Petrozzello

The tone at the top of an organization is vitally important. If the people running things are behaving in an unethical manner, how can one expect the rest of the firm to operate any better? If you are working at a company and you get the message that leadership is for those who operate without regard to the rules, then wouldn’t the probability be high that you would either leave or start breaking the rules yourself? Often when a leader of a company is caught breaking the law, stories follow about a culture of bad behavior at that company.

Craig Haber became a partner, based in New York, at Grant Thornton in 1993. In 2004, he opened a business checking account in the name of a company with a name very similar to Grant Thornton. Then, between 2004 and July 2012, Haber deposited $3.97 million in checks made out to Grant Thornton into the fraudulent account that he had opened. That is eight years of funneling almost $4 million in company funds into his personal account. How Haber managed to do this shows how he got the opportunity to take advantage of weaknesses in the Grant Thornton control system in order to perpetrate his fraud.

When Grant Thornton sends out bills to its clients, it attaches a page to the bill with instructions on how to either wire money into their account or send a check to their Chicago office, which is where their head office and billing department are located. Beginning in 2004, Haber would send billing statements to some clients and, instead of the usual payment instruction sheet, Haber instructed the clients to send payments to “Craig B. Haber”, in care of Grant Thornton, at the Grant Thornton New York offices. He also sent these payment instructions to some clients via email. When he received these payments, he deposited the bulk of them into the fraudulent account that he had opened. He got around the discrepancies by telling Grant Thornton that he had collected lower fees than what he actually collected.

It appears that Craig Haber had too much access to the billing system. In a company, seniority is no reason for reduced controls. Seniority should be a greater incentive for implantation of controls. Because it tends to be more difficult for an employee to say no to a higher up in a company, it is important that a system is built that says no on the employee’s behalf. All bills should have come from the billing department and the billing department should have sent clients billing statements detailing a running balance detailing payments received over a period of time. If that had been the case, some clients would have contacted Grant Thornton to find out why some of their payments were not reflected on their statement.

Grant Thornton should also have worked to limit what payments went to the partners, instead of being sent directly to the billing department. It is a challenge, but an occasionally reminding a client to send payments to the Chicago office may have gone a long way in reducing how much was stolen by Haber.

The fraud of almost $4 million translates into many billing hours that Haber was short on. I am not sure how he explained this shortfall but there should be a way to verify this for partners, in the same way that, I am sure, there is a way to verify billable hours for other employees of Grant Thornton.

Craig Haber received the Grant Thornton payments, which he then redirected to his personal account, via the US Postal Service. Therefore, when Grant Thornton discovered the fraud and reported it, the investigation was carried out by the US Postal Inspection Service and headed by Postal Inspector Melissa Atkin. True to the elements of the fraud triangle, Haber claimed that he started defrauding Grant Thornton because of financial pressure and, as you can see, he took full advantage of the opportunity to take money from the company. Haber was charged with and convicted of mail fraud and faces both a fine and prison time.

Being at the top in his firm did not stop Haber from committing fraud and perhaps being at the top of his firm meant that he was able to perpetrate his fraud without detection for longer. The Association of Certified Fraud Examiners (ACFE) has found that fraud by those higher up in an organization tends to be greater in value and to go on for a longer period of time. Being a CPA, who is supposed to practice according to a Code of Professional Conduct and uphold certain ethical standards, makes Haber’s crime even more disappointing. He stands to lose his CPA license, in addition to the jail time and fines. I would not be surprised if Craig Haber’s behavior had ripple effects among those that he supervised and dealt with, including a decrease in morale, cynicism about adherence to the code of conduct for CPAs and perhaps even bad behavior. If the people in charge are not minding the store, who will?

UPDATE

On March 12, 2014, Craig Haber was sentenced to 4 1/2 years in prison for stealing almost $4 million from Grant Thornton. During the time he was stealing that money, he earned nearly $6.9 million. Just goes to show that some people never have enough money. Now he gets to think about whether those millions were worth it. I, personally, would say no.

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It’s Not Worth It

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A forensic scientist made it into the news for all the reasons a forensic expert never wants to make it into the news. Annie Dookhan, a former chemist for the state of Massachusetts, who provided evidence and expert testimony, was caught forging a colleague’s initials. Once confronted, she admitted that she had forged the signatures of other co-workers and had also been falsifying lab test results for years. As her case unfolded, it turned out that she had broken all kinds of rules and left red flags of her unprofessional behavior all over the place and yet she was able to continue, unchecked, for several years.

To make her resume look more impressive, Dookhan padded her resume with a Master’s degree, in science, that she did not possess. An attorney, speaking about forensic science, described it as a “wild, wild west” and, looking at the case of Annie Dookhan, you could easily believe that. However, this does not need to be the case. When working with a forensic CPA, Certified in Financial Forensics (CFF), you can easily verify any qualifications claimed. CPA licenses can be verified via the relevant state boards and the CFF credential can be verified through the AICPA, who issues the credential. These certifications convey a level of knowledge, experience and expertise so you should check to make sure you have engaged someone who really is whom they claim to be.

Dookhan’s work seemed too good to be true and it turned out that it was. The average monthly testing output of her peers was 50 to 150 samples. Annie Dookhan tested 500 samples a month and she did this without claiming any overtime. A supervisor complained that he never saw her in front of a microscope and another coworker claimed that she would weigh samples without resetting the scales to zero. Despite these and other complaints, nothing was done for years. She continued to deliver several times more test results than any of her colleagues, without any reasonable explanation for her high numbers. In 2010, a coworker found seven separate instances in which Dookhan identified a drug sample as a certain narcotic when it was something else. The coworker explained this away as honest mistakes. When she was finally caught, Dookhan admitted that she routinely tested only five out of every 25 samples. She had been identifying drug samples merely by sight and not carrying out any tests, a practice known as “dry labbing”.

Granted, several coworkers found ways to rationalize the many red flags raised by Dookhan’s behavior. However, there were several fellow workers and supervisors who raised the alarm about Dookhan, voicing their concerns and observations to their superiors. Nothing was done about this for years and then when, in 2010, Dookhan’s work was audited, the audit was hardly anything that would be considered an audit. None of Dookhan’s samples were retested; the auditors merely reviewed her paperwork. This is a classic example of a poor tone at the top. The management at Hinton State Laboratory Institute, where Dookhan worked, received reports of an employee who appeared to be skirting proper procedures and who was definitely, mysteriously outperforming her colleagues by unbelievable margins, yet they seemed reluctant to do anything about this. From Dookhan’s own admissions, she, at times, intentionally changed negative sample results into positive ones. She was also accused of recording inflated weights of samples so that the accused was facing stiffer penalties. She often manipulated test results in favor of the prosecution. This may have made the lab, and Dookhan in particular, a preferred expert for the prosecution. Perhaps the lab liked the business they were getting because of their reputation and management was unwilling to jeopardize things. If management was not interested in enforcing rules and standards, it should not be a surprise that they were so shamelessly flouted for so long. The fallout has been far-reaching. Dookhan tested over 60,000 samples and every one of the results from these tests is now open to being disputed. Some people have already been released from prison, as cases may now have to be retried. The work of everyone in the lab is also under investigation as it is now clear that there was poor oversight and supervision at the lab and it is also possible that Dookhan may have contaminated the work of others. Dookhan was sentenced to three to five years in prison.

Anyone seeking the services of a forensic accountant must never seek an Annie Dookhan. On the face of things, it may appear fantastic to have someone who produces unreal results, is always on your side and invariably tells you what you want to hear. However, you should be encouraged if you work with a forensic accountant who is not afraid to give you the facts, even when the facts are not in your favor. In the long run, what will stand up in court and keep everyone out of trouble is work done without cutting any corners, manipulating the truth or violating the law in any way.

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