Executive Fraud Blog

I found this article interesting in that it points out how difficult it will be to get these executives for fraud without an email basically saying that they willfully provided valuations despite having knowledge that they were incorrect. What the article does not address is whether the action would fall under Sarbanes Oxley which would provide prosecutors with another means of pursuing these executives in court.

Steven Garfinkel, CFO of the medical equipment manufacturer DVI Inc., was recently sentenced in the third prosecution to occur under the corporate accountability section of Sarbanes Oxley. This fraud case involved Garfinkel pledging the same assets as collateral for two separate loans. When the company tanked, Fleet Bank was left with a loss of $51 million from DVI.

Since Garfinkel as CFO had signed filed with the SEC that the financial statements were free from fraud and an accurate representation of DVI's financial position under Sarbanes Oxley he was liable for personal liability. Pending appeal he is currently being sentenced to 2 1/2 years in prison and must pay back the $51 million in restitution.

Last year a 15 member commission was created by the US Chamber of Commerce to evaluate the effects of litigation & regulation on the US capital market. Tom Donohue, the CEO of the Chamber, is a powerful business lobbyist that has become critical of the implementation of Sarbanes Oxley (SarBox) especially section 404 which covers the assessment of internal controls.

The question remains: Is the litigious US business environment driving away foreign investment in US public companies? Has SarBox section 404 caused these declines and how could it be changed to build confidence but retain assurance of the efficiency of internal controls?

Despite the criticisms in the report, the Securities and Exchange Commission's (SEC) Christopher Cox has responded with an acknowledgement of the difficulties of SarBox but an emphasis on the new changes. The Complete Act of 2007 recommends a limitation of section 404 that only requires the internal control audit on a three year basis. Another change proposed attempts to reduce the costs of these 404 audits for smaller companies by making them voluntary. There is also a movement to rely more heavily on the internal audit function for an assessment of lower risk internal controls.

By changing the rules for implementation the SEC feels that it would appropriately mitigate the costs to firms for their audit AND reduce their exposure to unwarranted securities fraud lawsuits.