Teamwork counts, especially when it comes to committing crimes at a corporation.
In a new examination of 374 companies accused of securities fraud between 1997 and 2002, an average of seven people were implicated in each case, including CEOs, chief financial officers, chief operating officers, general counsels, board directors and auditors.
“Far from being a solitary act, securities fraud necessarily requires complicity,” said William Black of the Kansas City, Mo.-based Institute for Fraud Prevention, which sponsored the study.
The institute is a coalition of universities funded by the Association of Certified Fraud Examiners, the American Institute of Certified Public Accountants, accounting firm Grant Thornton LLP and D-Quest Inc., a risk-management firm.
The study (see it at www.theifp.org) examined companies accused of fraud in lawsuits or regulatory actions.
CEOs were implicated in nearly 90 percent of the cases examined. Next came CFOs, 78 percent. Then board directors, 40 percent; vice presidents, 36 percent; COOs, 20 percent; controllers, 19 percent; and general counsels, 7 percent.
Big accounting firms – including Arthur Andersen, KPMG, Deloitte & Touche, Ernst & Young and Price Waterhouse – were implicated in 18 percent of the cases, the study said. (Grant Thornton, which sponsored the study, is not mentioned, but it has had similar issues.)
The study said that in many cases, management ran the board instead of the other way around. Often, the board chairman and the CEO were one and the same.
Wrongdoing at Denver-based Qwest came after the period examined in the study – but the pattern at Qwest fits the profile.
Joe Nacchio, who will be sentenced July 27 on insider-trading charges, was both CEO and co-chairman at Qwest.
Former CFO Robin Szeliga pleaded guilty to illegal insider trading. Other former executives were convicted on criminal charges or were implicated in civil charges filed by the U.S. Securities and Exchange Commission.
Qwest’s board and the entire company settled civil lawsuits as well as SEC charges that alleged the entire company was a criminal enterprise. Qwest’s auditor – which sanctioned suspect swaps of telecommunications assets – was also Enron’s accountant, Arthur Andersen.
Nacchio is appealing his conviction on 19 counts of illegal insider trading. I think he sincerely believes he didn’t commit a crime.
“A fair number of these CEOs would probably be able to pass a polygraph examination,” said Black. “There’s a great line about that: ‘Every con man starts out by conning himself.”‘
Black is the author of a book about the savings-and- loan debacle called “The Best Way to Rob a Bank Is to Own One.”
He says CEOs are born manipulators. If they turn to the dark side, they already have the requisite skills to convince everyone that illicit deeds are legitimate.
“Nobody thinks of it as a criminal operation, even though that’s what it often becomes,” he said.
Part of the culture
Robert Tillman, a sociology professor at St. John’s University in New York and an author of the study, calls it “normalized corruption.”
“What you find … is a culture in which these things become legitimate and normal,” he said. “People might think things look odd at first, but gradually they look around and they think, ‘Well, everybody is doing it. I might as well get on board.”‘
Ultimately, everyone falls in line with their economic self-interest. There is no need to discuss a conspiracy when everyone gets stock options.
The study notes that between 1997 and 2002, nearly 10 percent of the firms listed on three major stock exchanges announced financial restatements. Between 2002 and 2005, 16 percent of these companies announced restatements.
Lawmakers have responded with new regulations known as the Sarbanes-
Oxley Act. Now there’s talk about rolling back many of its provisions because they have been onerous for business. Why let a few crooks spoil it for everyone?
“It wasn’t just a few rogue CEOs,” said Tillman. “It was a large number of people in coordinated networks of professionals, accountants, bankers, stock analysts and lawyers. … Now is not the time to remove our surveillance of them.”
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-954-1967 or alewis@denverpost.com.
