The Simplest of Frauds

It was the simplest of frauds.

The former Chief Financial Officer of a company that produces electronic databases of archived information from publishers settled charges made by the United States Securities and Exchange Commission that, with the use of spreadsheet aids, he made fraudulent monthly and quarterly and accounting entries for more than five years.

As part of the scheme, Scott Hirth, who was vice president of finance and CFO of the information and learning division of ProQuest Company from 1999 through 2005, created false documentation to back up the balances in accounts he manipulated.

It was the simplest of frauds.

His account-reconciliation spreadsheets, for instance, contained "hidden rows" so that false account entries didn't show up when they were printed in hard copy.

The former finance chief also covered up false information by rendering it invisible through the use of "white font," or white-colored text, in the spreadsheets.

"Hirth’s deceptive intent in carrying out his fraudulent accounting scheme is further evident in a number of notes he authored," according to the SEC.

The notes referred to being "caught" for accounting problems, "cooking the books," the possibility of going to "jail," and the accounting scandals at "Enron and Worldcom".

The motive for the fraudulent scheme was Hirth's desire to rise through the management ranks to become the president of the division and, eventually, the chief executive officer of ProQuest.

The company's senior management had identified him as a future leader of the company. Indeed, he served as acting president of the division during the summer of 2005.

"Consistent with this desire, Hirth was fearful that his ambitions would not be realized if he reported [the division's] true financial position," the SEC asserted.

The SEC also alleged that ProQuest failed to put together and run a system of internal accounting controls that might have prevented Hirth's scheme and that the company failed to apply other basic accounting principles properly.

The SEC charged that Hirth made false accounting entries that materially inflated ProQuest's reported pre-tax earnings for 2001 through 2004 and the first three quarters of 2005.

The scheme ultimately cost the company more than $437 million in market capitalization and caused its stock price to drop from $29.41 to $12.31 per share between February and April 2006.

(Thanks to Cecile for bringing attention to the article on which this post is based - SEC: Ex - CFO Used Spreadsheets for Fraud Stephen Taub, CFO Magazine, July 22, 2008)