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)
How can you protect something that is the natural evolution of technology
This is the story of the inventor of the intermittent windscreen wiper.
It is also a classic case study in the dangers of not having in place the appropriate processes to protect, defend and exploit intellectual property to the inventor's commercial advantage.
This is Robert Kearn's journey.
***
Mary Anderson, of Birmingham, Alabama, is usually credited with inventing the windshield wiper.
In 1903, during a visit to New York City, she took a streetcar during a snowstorm and saw the driver repeatedly stop his car to go outside and clean its front glass.
Anderson went home and designed a wiper mounted on a spindle that ran through a hole in the windshield frame and connected to a handle inside the vehicle. A counterweight and spring mechanism kept the rubber blade pressed against the glass.
Over the next 60 years, these and other advances made driving in the rain much safer, but a problem remained: The wipers kept going monotonously back and forth without any pause.
You could vary the speed, but even so, there was always a wiper in your field of vision, and the blades often scraped across a windshield that was nearly dry. The resultant friction made an annoying sound and tore up the blades’ edges.
***
In November, 1962, Bob Kearns was driving his Ford Galaxie through the streets of Detroit when it started to rain lightly.
Kearns turned the wipers on low. In those days, even the most advanced wipers had just two settings, one for steady rain and one for heavy rain; in a mizzling rain, they screeched back and forth across the glass, mesmerizing the driver, and occasionally causing accidents.
Kearns' vision was already impaired as a result of an accident nine years earlier, when, on his wedding night, he was hit in the left eye by a flying champagne cork.
Now, straining to see through the windshield, half thinking about his lousy wipers and half thinking about his bad eye, Kearns had what the Wall Street Journal later called "the kind of inspiration that separates inventors from ordinary people."
He thought, Why can't a wiper work more like an eyelid? Why can't it blink? The idea for the intermittent windshield wiper entered his mind.
In 1963 he built an intermittent wiper system using off-the-shelf electronic components and offered it to Ford.
The interval between wipes was determined by the rate of current flow into a capacitor. When the charge in the capacitor reached a certain voltage, the capacitor discharged, activating the wiper motor for one cycle.
After extensive testing, Ford executives decided to offer Kearns’s intermittent wipers as an option on the company’s Mercury line beginning with the 1969 models.
Kearns assigned his patent rights to the Tann Corporation, a Detroit tool-and-die company, which planned to sell the wipers to Ford and other carmakers. Tann paid Kearns $1,000 a month to continue improving his design.
Kearns had refused to tell Ford how his system worked; the prototype was sealed in a red box labeled do not open. Then one executive told him that since windshield wipers are a safety feature, he was legally required to explain their functioning. Kearns did so.
A few months later he was told that Ford had changed its mind and chosen a different electronic intermittent-wiper system that it had developed in-house. Kearns wanted Tann to sue, but the company depended on Ford for a big chunk of its business, so it was not about to make waves.
Kearns moved on, taking a job with the National Bureau of Standards and moving his family to Maryland.
Then, in 1976, he took apart a wiper control that one of his sons had bought.
He found that it was basically the same system he had invented.
Kearns promptly had a nervous breakdown, fled his home, and spent several weeks in a psychiatric ward. When he emerged, his hair had turned white.
He sued Ford for patent infringement in 1978, later suing Chrysler as well and making plans to sue General Motors and foreign manufacturers.
It took 12 years for the Ford suit to reach trial, as Kearns spurned repeated offers to settle. His wife left him in 1980, and a bitter divorce suit ensued; he spent five weeks in jail in 1990 for nonpayment of alimony.
Ford’s legal team argued that Kearns’s patents were overly broad and therefore invalid.
As Ted Daykin, a former Ford engineer, told The New Yorker in a 1993 article, “An electronic timing device was an obvious thing to try next. How can you patent something that is in the natural evolution of technology?”
The intermittent wiper, according to Daykin, was really the work of dozens of anonymous engineers at Ford, Trico, and other firms.
In the end, Kearns achieved the vindication he craved—and wrecked his life.
He won $10.2 million from Ford in 1990 and $18.7 million from Chrysler in 1995, though both juries determined that the companies had not intentionally infringed on his patents.
Near the end of the Chrysler litigation, he fired his fifth law firm and decided to represent himself.
The work overwhelmed him, and when he began missing deadlines, the remaining suits were dismissed.
He retired, but his patent rights remained an obsession until Alzheimer’s disease overtook him.
In 2005 Robert Kearns died in a Maryland nursing home.
In his final years, he drove around in two aging vehicles: a 1978 Ford pickup and a 1965 Chrysler.
Neither had intermittent wipers.
Kearn's story has been made into a Hollywood movie - Flash of Genius to be released in October 2008
The transition is a period of potential vulnerability, and the idea is to have someone making sure that no balls get dropped and no missions go unaccomplished
An interesting case study of succession planning is unfolding in the top echelons of the United States Government - the aim: to prevent the transfer of Presidential power in January 2009 from disrupting defence and counterrorism efforts.
The Obama and McCain campaigns are working to compile lists of potential nominees for dozens of national-security and counterterrorism positions so would-be policy makers can be vetted and confirmed as quickly as possible.
Given the inevitable gaps, Defense Secretary Robert Gates has asked senior Pentagon officials to be prepared to stay in their jobs for the first few months of 2009. The Obama campaign has endorsed the idea.
At the Department of Homeland Security, career officials have been assigned to the No. 2 posts in critical areas so they can step in when political appointees leave.
The push reflects the challenges posed by the first wartime political transition in more than 40 years and fears of a possible terrorist strike or major crisis in Iraq or Afghanistan during the next president's first months in office.
The Office of the Director of National Intelligence and Department of Homeland Security have never been through a transition.
The effort is designed to avoid the power vacuums that usually accompany a shift in administration.
A recent op-ed noted that it took the Clinton and Bush administrations nearly six months to get major Pentagon and State Department personnel confirmed and into office. Both administrations faced crises shortly after taking office.
This transition will mark the first wartime handover of presidential power since the Johnson administration ceded control of the Vietnam effort to the Nixon White House.
Some analysts fear the Government's transition efforts may fall short.
A report from the National Academy of Public Administration, a nonpartisan group chartered by Congress to give management advice to the government, said it may be impossible to get security clearances fast enough for officials designated by the president-elect.
The report commended the Government for getting an early start on transition work, but warned that some departments "lack an overall transition plan...with objectives, goals and time lines."
Based on Wall Street Journal Article White House, Candidates Plan Smooth Transfer of Power By Yochi Dreazean and Siobhan Gorman July 3, 2007
The Compleat Angler Hotel is a classic 400 year old English country house style lodging situated in an idyllic setting on the banks of the River Thames - a short walk across the bridge to the town of Marlow.
It is also the key meeting place for one of the most blatant disregard for good corporate governance in modern business history.
This is the story of the two Dow Chemical Company senior executives that forgot to tell the CEO and the Board that they were plotting a leveraged buy out (LBO) of the company.
***
The Dow Chemical Company is headquartered in Michigan.
As of 2007, it is the second largest chemical manufacturer in the world after BASF.
Dow is a provider of plastics, chemicals, and agricultural products with presence in more than 175 countries and employing 46,000 people worldwide with 2007 revenues of $USD53.513 Billion.
***
On January 18, 2007, the Financial Times reported "talk in the market" that "a consortium of private equity groups are working on a breakup bid" for Dow.
Dow's share price was spiking; its shareholders, employees, and joint venture partners were demanding more information; yet its CEO, Andrew Liveris, was totally in the dark about what, if anything, lay behind the rumor.
The next morning he e-mailed Dow director and former chief financial officer J. Pedro Reinhard, whom he knew to be plugged in to the financial community.
"Can you sniff around your contacts?" he asked. "Let me know if this has any basis?"
About two hours later Reinhard replied dismissively, "This rumor was in the market for about over six months."
"Anything new?" pressed Liveris.
"Not that I am aware," Reinhard responded.
Reinhard was not being candid with his CEO.
A few hours before tapping out his responses, he had been meeting with two advisors working for an Omani sovereign wealth fund.
The fund was trying to form a consortium with U.S. private equity firms to launch a LBO of Dow.
According to later statements by the advisors, Reinhard and one of Dow's highest-ranking executives, Romeo Kreinberg - then responsible for about half of Dow's global operations - had been in a hotel room flipping through a 100-page booklet prepared by a London affiliate of J.P. Morgan Chase outlining how the Omani-led LBO would proceed.
They were also discussing the compensation Reinhard and Kreinberg might expect if the deal went through as planned - Reinhard would be chairman of the new entity and Kreinberg chief executive.
During the first half of 2006, Dow's share price was languishing, and the company was regularly being approached by investment banks with unsolicited presentations proposing deals to increase shareholder value, including breakup LBOs.
In July the company's senior management and board held a weeklong strategy retreat in Newport, R.I., where they debated six strategic "optionalities," including a breakup of the company.
Liveris argued that Dow's commodities and performance segments were so interdependent that it was best to maintain the company's integrated structure. Instead of a breakup, he favored an "asset light" strategy, in which Dow would "monetize" its commodities assets by, for instance, selling joint venture interests in them while keeping operational control. The proceeds would be used to expand the performance units.
The board backed Liveris's asset light strategy and rejected breakup strategies.
The only dissenter was Reinhard.
It was at the same time that these discussions were being held that Reinhard was working on the LBO of Dow.
In the maddening rush, he forgot to tell the Chief Executive Officer and the Board of his conflict of interest.
As a result of information gained during the discovery process, Dow's board later leveled an additional charge against Reinhard - that he had, without its board’s knowledge or permission, served as an observer at board meetings of another chemical company, Basell, which recently merged to become LyondellBasell. (Basell and, now, LyondellBasell are businesses privately owned by the holding company Access Industries, an investment vehicle privately owned by billionaire Len Blavatnik.)
The planned LBO came to light after three London newspapers reported rumors about the bid. Dow CEO Andrew Liveris then made inquiries of JP Morgan Chase CEO Jamie Dimon, who ultimately confirmed that, in fact, the bank’s London office had pursued such a plan, and that Kreinberg and Reinhard had been involved.
Dow’s board terminated the two executives two days later.
(Based on "Inside Job" by Roger Parloff - Fortune July 1st, 2008)
The group accessed systems for the challenge of getting into places they weren't supposed to.
414 is the area code for Milwaukee.
It is also the name of what is considered one of the first known hacking organisations.
The 414s were a group of six teenagers who - in the early 1980s - broke into dozens of high-profile computer systems including the national laboratory of the United States Department of Energy - the Los Alamos National Laboratory which helps develop nuclear weapons.
Ranging in age from 16 to 22, they met as members of a local Scout troop.
During a nine day hacking spree, the group accessed systems for what they said was the challenge of getting into places they weren't supposed to and remaining there undetected.
Other than minor damage (ostensibly to cover their tracks) on one system, the group caused no financial damage.
It did, however, demonstrate how easy it was to hack a system.
They used inexpensive personal computers and simple hacking techniques, such as using common or default passwords and exploiting well-known, but unpatched, security holes.
Most of the members of the 414s were not prosecuted, in various agreements to stop their activities and pay restitutions. Two members pleaded guilty on two counts of "making harassing telephone calls".
As a result of news coverage including a cover story in Newsweek, members of 414 testified before the U.S. House of Representatives in September 1983 about the dangers of computer hacking, and six bills concerning computer crime were introduced in the House that year.
This was six years after the first attempt at such a law.
In 1977, Sen. Abraham A. Ribicoff (D-Conn.) introduced the Federal Computer Systems Protection Act, which sought to define "computer crimes" and recommended penalties for such crimes.
One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans.
All you need is one single black bird.
Did you know that until Australia was discovered there was a phrase that "all swans are white".
In that context, a black swan was a metaphor something that could not exist.
The discovery of Australia - and the discovery of a large black waterbird breeing in the sout of Australia, the black swan - meant that perceived impossibilities actually come to pass.
***
Nassim Nicholas Taleb, a professor in marketing at the London Business School, has popularised the phrase "black swan" in describing a large impact, hard to predict and rare event beyong the realm of normal expectations.
To be considered a black swan, Taleb sets three criteria
it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
it carries an extreme impact.
in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
In Taleb's definition many scientific discoveries are black swans— undirected and unpredicted. Events such as the September 11, 2001 attacks on the United States also fall within the definition.
Taleb's contribution to risk literature is that he challenges the theory that it is possible to draw general conclusions (about risk) from specific observations.
His claim is that almost all consequential events in history come from the unexpected—while humans convince themselves that these events are explainable in hindsight.
One problem identified by Taleb is the the assumption that the unexpected can be predicted by extrapolating from variations in statistics based on past observations.
He argues that many events are simply without precedent, undercutting the basis of this sort of reasoning altogether.
The first chapter of Taleb's book The Black Swan - The Theory of the Highly Improbable can be found:
There is copious evidence here that the people running this process just did not know what they were doing.
So many of these mistakes seem to be traceable not to a bad process but to people who were not implementing the process objectively or professionally.
The Government Accountability Office (GAO) is the audit, evaluation and investigative arm of the United States Congress.
As part of its mandate, the GAO has statutory authority to preside over “protest(s) concerning an alleged violation of a procurement statute or regulation.”
Such protests include written objections to a solicitation for offers for a procurement contract, cancellation of a solicitation, the award of a contract, or the termination or cancellation of a contract, if the objection is based at least in part upon improprieties relating to the initial award.
***
A recent GAO bid protest relates to the contract for 179 tankers worth up to $US100 billion to replace the Air Force's entire tanker fleet over the next 30 years. Tankers are used to refuel warplanes in mid-air.
Boeing, which has supplied the Air Force with all of its refueling planes, was the heavy favorite to win the contract. The Air Force, though, announced in February that Northrop and EADS, the parent company of Airbus, had won with a superior plane and proposal.
The Northrop tanker is based on the Airbus A330 commercial jet. Boeing's tanker would be based on the smaller 767.
***
Upon being advised of being the unsuccessful supplier, Boeing filled a bid protest with the GAO.
Boeing challenged the Air Force’s technical and cost evaluations, conduct of discussions, and source selection decision.
The GAO released its decision last week and was scathing in the procurement selection processes that the Air Force had adopted in the selection of the alternative bid from Northrop.
The GAO noted:
The Air Force did not assess the relative merits of the proposals in accordance with the evaluation criteria identified in the solicitation
The Air Force violated the solicitation’s evaluation provision that “no consideration will be provided for exceeding [key performance parameter] KPP objectives” when it recognized as a key discriminator the fact that the Northrop proposed to exceed a KPP objective relating to aerial refueling to a greater degree than Boeing.
The documentation did not demonstrate the reasonableness of the Air Force’s determination that the Northrop proposed aerial refueling tanker could refuel all current Air Force fixed‑wing tanker‑compatible receiver aircraft in accordance with current Air Force procedures, as required by the solicitation.
The Air Force conducted misleading and unequal discussions with Boeing, where the Air Force informed Boeing that it had fully satisfied a KPP objective relating to operational utility, but later determined that Boeing only partially met this objective, without advising Boeing of this change in its assessment and while continuing to conduct discussions with Northrop relating to its satisfaction of the same KPP objective.
The Air Force’s evaluation of military construction costs in calculating Northrop’s most probable life cycle costs for their proposed aircraft was unreasonable, where the evaluation did not account for Northrop’s specific proposals, and where the calculation of military construction costs based on a notional (hypothetical) plan was not reasonably supported.
The Air Force’s use of a “Monte Carlo” simulation model to determine Boeing's probable cost of non-recurring engineering associated with the system demonstration and development portion of the acquisition was unreasonable, where the model’s inputs concerned total weapons systems at an overall program level and there is no indication that this is a reliable predictor of anticipated growth of Boeing’s non‑recurring engineering costs.
"But for these errors," the GAO said, "we believe that Boeing would have had a substantial chance of being selected for award."
The GAO’s ruling does not legally bind the Air Force to re open the bid process – rather it can only recommend a course of action.
There is, however, immense political pressure for this to be done.
Honestly Lay Bare is a forum of publicly available information of instances of either best / worst practice internal control situations.
Actually it is more than that ... it is a place where a concept, an idea, a thought, a viewpoint, a hypothesis is stripped of its noise to honestly lay bare the underlying issue.
Yes it will mostly focus on internal auditing, risk management and corporate governance but there will be times when interest takes us all down paths less busy yet not less interesting. The title refers to the phrase used by the Hudson Bay Company in the establishment of managerial internal audits in 1871 - the role of such reviews being to "honestly lay bare to the proprietors the true condition of the undertaking".
