Fraud Was As Insidious As It Was Destructive

What do Scott Sullivan, Andrew Fastow and Mark Swartz all have in common?

Before these once-prominent chief financial officers became convicted felons, all three had been named “CFO of the Year” by CFO magazine in the late 1990s.

“These CFOs were not chosen by CFO magazine, but by a survey of their peers. So it wasn’t just the average people who didn’t see what was coming,” said Neil Weinberg, senior Forbes magazine editor.

“It was also interesting that this was a contest for ‘CFO of the Year’ that was sponsored by Arthur Andersen.”

Weinberg addressed about 350 professionals in the internal auditing field who attended the 2008 UT Dallas Fraud Summit on March 28. Co-sponsored by UT Dallas School of Management’s Internal Auditing Education Program, the conference featured a cross-section of government and law enforcement representatives who covered key issues involving economic crime, including money laundering and Internet crime, as well as the latest fraud schemes and fraud prevention techniques.

Drawing on his recently published book, Stolen Without A Gun, a look at white-collar crime that he co-wrote with convicted embezzler Walter Pavlo Jr., Weinberg discussed why tough new laws, heavy spending and countermeasures aimed at stamping out corporate crime have been unsuccessful.

The price of fraud

Nationwide, fraud losses amount to approximately $630 billion a year – more than the United States has spent in five years in Iraq, Weinberg told the audience.

Corporate crime has actually increased since the 2002 Sarbanes-Oxley Act, which Congress passed in hopes of upgrading corporate accountability in the aftermath of the Enron scandal, Weinberg said. Of the companies taking part in a recent Pricewaterhouse Coopers survey, about half reported corporate fraud in the past year, he said.

“These are not nice times. These are scary, historic times. What we have witnessed in the last week or two we have not witnessed since the Great Depression,” Weinberg said. “We have seen this year for the first time since the Great Depression a national decline in housing prices.

“Right now we’ve obviously gone from boom to bust, and my theory on fraud, busts and bubbles is that they’re inextricably linked. And while we have fraud at all times in all places, the real big ugly ones tend to come out at times like this,” he said.

Bull markets make heroes; bear markets make crooks, he said. When times are good, people suspend good judgment, and when fraud is uncovered, “people come up with reasons why it wasn’t their fault,” said Weinberg, who has profiled corporate, mutual fund and pension scandals and has covered financial markets for many years.

Fraud happens

Triggers to fraud, he said, include unrealistic expectations, the tone at the top of the company, rationalization and opportunity. Stolen Without a Gun illustrates this point with Pavlo’s story. A fast-tracker who pleaded guilty to siphoning off $6 million as a debt collector for MCI Communications, Pavlo and colleagues cooked up a scheme in which they persuaded troubled clients to pay a bogus financing firm in the Cayman Islands to cover their MCI debts while Pavlo secretly erased them from his employer’s books.

A seemingly ordinary, well-educated, mid-management employee, Pavlo illustrates the reality about the white collar scandals that have occurred since and are breaking news almost every day, Weinberg said.

Weinberg suggested that to deter fraud, companies must set the proper tone at the top, offer appropriate compensation and training and embrace tougher consequences for those caught.

“People often ask me what the answer is, and unfortunately, there’s no magic bullet, but I do think the tone at the top is very important. … This type of crime doesn’t happen in a nunnery. It happens in a certain type of corporate environment,” Weinberg said.

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