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Shielding Yourself Against Fraud

The lawyer who helped get HealthSouth ex-CEO Richard Scrushy acquitted of fraud charges says all CFOs should safeguard themselves against a likely rise in corporate investigations.
Sarah Johnson, CFO.com | US
March 11, 2009

(Click here to view video of this and all other available presentations from the latest CFO Rising conference.)

Inside corporations, the financial crisis has sparked a renewed interest in the talents of CFOs, who are expected to come up with ways to simultaneously cut costs and offer growth plans during lean times. But the credit crunch likely will also attract unwanted attention from outside forces, as companies in all industries, struggling during the downturn, could be subject to greater scrutiny by prosecutors and regulators, according to defense attorney James Parkman, whose most infamous client was Richard Scrushy, the former HealthSouth CEO acquitted of the health-care provider's $2.7 billion fraud earlier this decade.

Parkman put a roomful of senior finance executives on notice during the CFO Rising conference in Orlando this week, warning them that their careers and reputations are at risk if they don't take personal and professional measures to protect themselves. "Corporate executives — especially CFOs — have the deadliest job in the world today," Parkman said.

To be sure, CFOs at publicly traded companies don't risk their lives when they walk into their office every day. Still, they do put their professional futures on the line every time they certify their companies' financial statements as required under the Sarbanes-Oxley Act. Parkman warned that, to avoid legal liability, CFOs need to educate employees on their companies' compliance policies, be on the constant lookout for fraudulent behavior, and take precautions in case they ever become part of a criminal or civil investigation.

Parkman contends that because of the public's heightened interest in the financial crisis - including questions about financial institutions' risky lending policies, executive compensation at government-assisted banks, and the recently uncovered high-profile Ponzi-style schemes — finance departments across industries will be dissected by U.S. investigators eager to appease political headwinds. He warned that even CFOs innocent of wrongdoing should be worried as any investigation could cost them their job and cut into their personal finances, because they may be considered ultimately responsible if fraud happens on their watch. "Cases like [HealthSouth's] — even if you've done nothing wrong — can ruin you," he said.

The decade-old guidelines that U.S. prosecutors follow when considering a company's cooperation regarding indictment decisions have been softened somewhat in favor of employees' constitutional rights, say some legal experts. The memorandum that contains the guidelines — which was originally crafted during the Clinton administration by Eric Holder, the new attorney general — now restricts how prosecutors can seek privileged information from companies. Still, critics like Parkman believe the guidelines, under Holder's supervision, could continue to be used to coerce companies into refusing to pay employees' legal fees or terminate employees, including CFOs, suspected of wrongdoing.

Parkman recommended that CFOs buy their own directors' and officers' insurance policy so that they will be covered during any type of investigation, even if their company files for bankruptcy protection and loses its D&O policy.

Scrushy — who was cleared of charges that he manipulated earnings but convicted of bribery in an unrelated case — ended up paying $30 million of his own money to defend himself in the HealthSouth criminal case, according to Parkman. In related cases, five of the company's former CFOs were charged in connection with the fraud and served various prison sentences. 

HealthSouth's accounting fraud was fairly simple, Parkman claims, but went undetected for several years. The fraud was able to continue mostly because the company's general ledger was hidden from its outsider auditor, divisional managers didn't question unwarranted spikes between months in their reported quarterly earnings, and no one seemed to notice that the company was inflating earnings.

Parkman suggested that CFOs can learn a few lessons from the Healthsouth case, among them: be wary of your employees. Parkman advised CFOs to be keenly aware of what their staffers are doing, especially as pressure to "make the numbers" increases during the recession. "Keep your eyes and ears open as CFO," Parkman said.

In addition, Parkman stressed that CFOs can safeguard their own jobs by making sure the rest of the company is informed about compliance policy and that staffers participate in the company's ethics training program. CFOs can do this by posting the compliance policy in a common area, such as a break room, and reminding employees that all e-mail and text messages could be subpoenaed. Make it clear that you will not tolerate any inappropriate behavior from company employees, he added.

To further protect yourself, require that all employees carry a card stamped with the company's fraud hotline on it. Any calls made to the number should go the external audit firm, which should then share the information with the audit committee and if appropriate, with the CFO, Parkman said.


Another way to detect fraud is by monitoring online message boards. Rarely, is there a posting that warrants an internal investigation — but taking the steps to regularly scan the board for problems ensures that you've taken measures to detect and address fraud. He further suggested that CFOs turn to their audit firm whenever something seems suspicious. All fraud tips and subsequent internal investigations should be well documented, he added.




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