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© September 2003
Association of Certified Fraud Examiners
Get Corporate Crooks on the Straight-and-Narrow
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aving viewed faked financial statements for over three decades, I'm pretty sure I know what the public wants from
an audit: assurance that their money will be entrusted to people with integrity. And face it—without that essential
ingredient, financial statements cannot be relied upon.
Reasonable investors know that there's no such thing as a sure bet. They can live with economic swings; they can accept
that yesterday's hot stock is now cold; they can understand when the market goes south. When that happens, people lick
their economic wounds, shrug, and go right back to investing.
But the public can't stand to be ripped off by crooked corporate leaders. One only has to examine a long string of
handsome jury verdicts against auditors for proof. We all have the same feelings: When someone makes a mistake, we
can forgive; when someone lies, it makes us mad as hell.
When it comes to cooking the books, those responsible are almost always in the executive suite. There is no method to
measure the integrity of executives, but in one study, the chief executive and/or the chief financial officer were directly
involved in at least 83 percent of the cases.
Take these examples:
• The Rigas family allegedly used Adelphia as its personal piggy bank. Among other things, company money was used to
finance stock purchases by the family—including $174 million pulled out to make margin calls. They also bought luxury
condos in Colorado, Mexico, and New York City, and built a $13 million golf course.
• Through a dizzying maze of off-book transactions, former Enron CFO Andrew Fastow lined his pockets to the tune of
$45 million. The money ultimately went from Enron's bank account to Fastow's. Moreover, at a time when Enron
employees could not sell their stock, Fastow and other insiders sold millions.
• Mickey Monus lost $500 million for Phar-Mor. On the side, he was embezzling tens of millions of dollars to support a
now-defunct basketball league for short players. Monus was caught when he started directly disbursing Phar-Mor's funds
to pay for his expensive hobby.
What all of these cases have in common is that ill-gotten gains were deposited directly into the bank accounts of those
involved. That's a pattern I have observed in examining thousands of fraud cases: Most people are caught when they
spend their illegal bounty, not when they steal it.
But the executives of corporate America don't routinely turn over their own tax returns, financial statements and bank
records for the auditors to pore over. They should, I'll argue.
THERE OUGHT TO BE A LAW
Executives of public companies have a fiduciary duty to act in the best interests of their shareholders; that's the law. Well
there should also be a law requiring the same people to open up their own finances for scrutiny—"executive
transparency," if you will.
Occupational fraud rarely occurs where there is adequate oversight. Bookkeepers are discouraged from embezzling
money because they are aware that a supervisor may uncover a suspicious transaction. But the same cannot be said of
high-level executives who operate with relative autonomy. That's why there needs to be a mechanism to keep them on
the straight-and-narrow.
For years, the federal government has required annual financial disclosures from key employees. If Congress must
disclose its finances, there is no good reason why executives of public corporations should not do the same. Here is a way
this plan might work.
Each year, selected executives would furnish their personal financial statements and tax returns to the auditors. They
would also sign an agreement allowing the auditors access to their banking information. The auditors would review the
information in light of other audit considerations; for example, the company's profit performance. If deemed appropriate,
the auditors would then conduct more in-depth reviews to determine the possibility of illegal acts.
There is little question that this technique would uncover more fraud in the executive suite. The nature of financial
shenanigans by corporate titans is such that they most often leave a clear audit trail. Ask any detective: To document
fraud, follow the money.
Still detecting fraud isn't all that easy, even for the experts. The objective should rather be to prevent these sorts of
crimes from occurring in the first place.
Legislation mandating executive transparency can go a long way toward that goal. If company insiders knew that their
finances were subject to close scrutiny, I would predict a significant deterrent effect. Corporate crooks are smart. And
they would quickly realize that, for once, they could run but they could not hide. •
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the 29,000 member Association of Certified Fraud Examiners in Austin, Texas, and
professor of fraud examination at the University of Texas. Mr. Wells is a member of the Journal of Accountancy Hall of Fame for winning the
Lawler Award for the best JofA article in both 2000 and 2002.
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