www.WestonSmith.biz
No single red flag may be
telling, but when waving
together, speak volumes.
1. Pressure to Maintain Those
Numbers
2. Fear and Silence
3. Young ‘Uns and a Biggerthan-Life CEO
4. Weak Board
5. Conflicts of Interest
6. Innovation Like No Other
7. Goodness in Some Areas
Atones for Evil in Others
1. Pressure to Maintain Those
Numbers
Pressure to Maintain
Those Numbers
Pressure to Maintain
Those Numbers
Healthsouth
-“27 Consecutive Quarters”
-Continued hype of stock
-Tremendous pressure on management to meet unrealistic
revenue targets
-Earnings growth defied logic of reimbursement changes
Pressure to Maintain
Those Numbers
WorldCom: Bernie Ebers- “Our goal is to be the No. 1
stock on Wall Street.”
Enron: Earnings growth targets of 15-20% annually, all
business units given targets derived from working
backwards from EPS forecasts
Tyco: Targets of 20% annual growth. Massive earnings
manipulation through acquisitions
Baptist Foundation of Arizona: 11,000 members lost
$590,000,000 in a faith-based Ponzi scheme
Pressure to Maintain
Those Numbers
Most earnings manipulations come
through revenue recognition issues.
Q: Are you faced with an obsession of
“meeting the numbers?”
Q: Has long-term vision been replaced
with short-term objectives?
1.
Pressure to Maintain Those Numbers
2. Fear and Silence
Fear and Silence
Fear and Silence
Healthsouth: Everyone- board members, officers,
employees and auditors were treated with a stick and
a carrot
Monday morning beatings
Backstabbing by the CEO
Spying and blackmail by the CEO
Enron: CEO Ken Lay had a “hair-trigger temper”
WorldCom: A rather simplistic fraud. “The less clever
the fraud, the more oppressive the culture must be
because executives are asking employees to go above
and beyond the call of duty in playing dumb.”
Tyco: Use of Key Employee Loan Program and
Relocation Loans to intertwine employees loyalty
Fear and Silence
Q: Is disagreeing, or just asking questions, so
unpleasant that it’s easier to just go along?
Q: Does the culture promote submissive
attitudes?
Q: Employees: Do you ever feel that your job is on
the line for simply doing what’s right?
Q: Auditors: Do you receive pushback from
clients on routine issues?
1.
2.
Pressure to Maintain Those Numbers
Fear and Silence
3. Young ‘Uns and a Bigger than
Life CEO
Young Un’s and a Bigger
than Life CEO
Young ‘Uns and a Bigger
Than Life CEO
Healthsouth: “of all the companies, the officers
in HS were the youngest with the least
amount of experience”
AIG: Hank Greenburg & two sons
Enron: Ken Lay surrounded by young ‘uns
WorldCom: Flamboyant CEO with young
officers
Tyco: Dennis Kozlowski’s $6000 shower curtain
Adelphia: John Rigas & 12 family members
Young ‘Uns and a Bigger
Than Life CEO
United Way: William Aramony, former CEO–
-Ostentatious lifestyle at the expense of
United Way
- Convicted on 22 counts of fraud
Young ‘Uns and a Bigger
Than Life CEO
Q: Does the experience and wisdom of key
employees match their responsibilities?
Q: Is management composed of Yes-Men?
Q: Who is being promoted- the Company or
Executives?
1.
2.
3.
Pressure to Maintain Those Numbers
Fear and Silence
Young ‘Uns and a Bigger than Life CEO
4. Weak Board
Weak Board
Weak Board
“Healthsouth takes the prize for
the board with the most
negative factors”
 Original investors
 Large ISO grants
 Joint investments w/ Richard
Scrushy
 Self-dealing
 Common directors on spin-offs
 Directors were manipulated,
ridiculed, and one even
blackmailed
Weak Board
Enron: Highly paid, significant conflicts of interest
WorldCom: “Bernie’s Board”, Loans to a director,
personal benefits, and significant stock holdings
Tyco: Asleep at the wheel, 8 of 12 were current or
former Tyco employees, 4 had served >10 years on
board, loan programs
Adelphia: Family members dominated the board
Weak Board
Q: Is your Board qualified to deal with
the responsibilities of the position?
Q: Are they effectively fulfilling those
responsibilities?
1.
2.
3.
4.
Pressure to Maintain Those Numbers
Fear and Silence
Young ‘Uns and a Bigger than Life CEO
Weak Board
5. Conflicts of Interest
Conflicts of Interest
Conflicts of Interest
Are decisions being made, or money being spent, solely for
Officers’ personal gain or ego?
Conflicts of Interest
Investment Firms: There are tremendous conflicts
between the research side and the sales side of
the house.
Smith Barney’s analyst, Jack Grubman, issued
glowing reports on Worldcom until the eve of
its collapse. Smith Barney would have earned
$21,000,000 in fees had the WorldCom-Sprint
merger been approved.
The housing market collapse can be heavily
blamed on conflicts of interest by lenders,
appraisers, and investment firms
Conflicts in the Auditing Profession
Conflicts of Interest
Q: Are there any related party transactions?
Q: Is there any sign of self-dealing?
Q: Is there an effective conflicts policy?
How do you know that it’s working?
1.
2.
3.
4.
5.
Pressure to Maintain Those Numbers
Fear and Silence
Young ‘Uns and a Bigger than Life CEO
Weak Board
Conflicts
6. Innovation Like No Other
Innovation Like No Other
Innovation Like No Other
“Innovators actually reach a point where they begin to believe
and publicize the hype about themselves, as if repeating
how innovative they are will somehow preserve the status
quo, if not improve upon it.”
Healthsouth: Financial indicators were substantially better
than their competition
Tenet: CEO comment months before revelation of abusive
Medicare outlier payments: “We’re just better than
everyone else”
Enron: Jeffrey Skilling - “We are the good guys…we are on the
side of angels”
Innovation Like No Other
AppleThey do
have
innovation
like no
other.
But they
have proven
themselves!
Innovation Like No Other
Q: Auditors- Are your clients falling within the
norm of the industry, or are they
exceptionally strong or weak? Why?
1.
2.
3.
4.
5.
6.
Pressure to Maintain Those Numbers
Fear and Silence
Young ‘Uns and a Bigger than Life CEO
Weak Board
Conflicts
Innovation Like No Other
7. Goodness in Some Areas
Atones for Evil in Others
Goodness in Some Areas Atones
for Evil in Others
Goodness in Some Areas Atones for
Evil in Others
Goodness in Some Areas Atones
for Evil in Others
Watch out for false prophets. They come to you in sheep’s
clothing, but inwardly they are ferocious wolves.
Matthew 7:15
Feel free to contact me:
www.WestonSmith.biz
weston@westonsmith.biz
@Westonspeaks