Smoke and Whistles

Readers comment on corporate fraud and other current topics.
CFO ReadersApril 1, 2011

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In regard to “Where There’s Smoke, There’s Fraud” (March), I have one important clarification. The article states, “Last year, the Committee of Sponsoring Organizations [COSO] of the Treadway Commission’s report on corporate fraud concluded that fraud continues to increase in depth and breadth despite Sarbanes-Oxley…”

In our COSO study, we were careful to point out that the vast majority of the frauds studied, which were based on Securities and Exchange Commission enforcement actions issued from 1998–2007, involved alleged bad acts that took place before Sarbox was passed. Specifically, only 61 of the 347 cases we studied involved misstatements after 2002. This is due to the long time lag from a bad act to its discovery to the completion of an SEC investigation into the act.

We concluded in the COSO report: “Given the small number of frauds examined in this study that involve time periods subsequent to the issuance of the Sarbanes-Oxley Act of 2002, further research will be needed once sufficient time has passed to allow for more observations of SEC fraud investigations involving post-[Sarbox] time periods before any conclusions can be reached about the effectiveness of that legislation in reducing instances of fraudulent financial reporting.” Thus, we believe that the effect of Sarbox on fraudulent financial reporting is still an open question, and the recent COSO report was largely a pre-Sarbox study.

Dana R. Hermanson
Dinos Eminent Scholar Chair
Kennesaw State University
Kennesaw, Georgia

The writer is co-author of “Fraudulent Financial Reporting: 1998–2007” (COSO report, by M. Beasley, J. Carcello, D. Hermanson, and T. Neal).


Where There’s Smoke, There’s Fraud” was an excellent article. I’d like to add some of my own points.

First, fraud can never be totally eliminated, but a reduction in fraud is possible. Since the collapse of Enron, practice actions of nonexecutive directors (NEDs) have been vital. NEDs play a vital role in the prevention of fraud and error. While NEDs are not responsible for running the company, they are responsible for transparency in the company’s operations.

The whistle-blowing provision in the Sarbanes-Oxley Act can also help to prevent fraud and error, but again, there must be loyal people willing to prevent whistle-blowers from losing their jobs.

Various kinds of automation can help, such as sales-proposal software that tracks the entire process from proposal through sale; tendering [procurement] software that can identify appropriate vendors and make transactions much more transparent; and online deal rooms, which can make M&A activities similarly transparent.

Nabeel Shaukat
Content Manager
Global Kap
New York



Prevention Is the Best Medicine

What the financial institutions recognize, but much of American business hasn’t yet, is that it’s not just the victim of stolen personal information that suffers the high cost of identity theft (“Rallying ‘Round the Red Flags,” Topline, March). Once fraud is determined to have occurred, the business defrauded is left holding the bag, and that loss gets passed on to consumers in the form of higher prices.

Unfortunately, the national debate around the Identity Theft Red Flags Rule was successfully hijacked by the professional classes, who are resistant to change, despite the obvious cost to their industries. In a survey published in November 2010 by the Healthcare Information and Management Systems Society, a third of information-technology professionals at hospitals and medical groups reported that their organization had had at least one known case of medical identity theft. Another study earlier this year from the Ponemon Institute showed 1.4 million Americans have been the victim of medical identity theft. And its associated costs are significantly higher than other forms of information fraud, amounting to about $20,000 to resolve each case.

Just as in health care, prevention is the best medicine against identity theft. The Red Flags Rule represented a major opportunity to educate professionals and small businesses about identity theft — and to arm them against it. Instead, they’ll discover the hard way the havoc identity theft wreaks on businesses and clients alike.

Eduard Goodman
Chief Privacy Officer
Identity Theft 911



The Facts of Lease

In “Space Race” (January/February) you accurately describe the opportunities for businesses to reduce real estate spend by renegotiating or committing to long-term leases. However, the article seems to imply that a real estate broker is simply adding a 5% annual broker’s commission to a lease.

First, while there may be some cases where a broker does not add value, a knowledgeable and experienced real estate broker will not only negotiate the rent, free rent, and tenant improvement allowance, but will also negotiate the lease provisions to ensure that they conform to the market. For example, expansion, termination, and renewal options as well as sublease provisions are all driven by the market, should be negotiated prior to drafting leases, and could be invaluable to a tenant. Being an active participant in the market is the only clear way to know if the market is calling for a right of first offer or a right of first refusal, penalties on termination options, 95% or 100% of fair market value on renewals, supervisory fees on construction, and so on. These provisions hold significant value, should be negotiated, and are things that simple lease comparables provided by a broker will not reveal.

Second, it is inaccurate to suggest that a tenant will save a 5% annual broker’s commission by negotiating directly. The full commission is still generated, but instead of it being paid to the tenant’s broker, it is paid to the building’s leasing agent. In this case, the landlord wins — the leasing agent gets a bigger commission and the tenant is likely leaving valuable lease provisions on the negotiating table.

Jack A. Cohen
Managing Director
Colliers International NY LLC
New York



Supporting Integration

Randy Myers wrote a commendable article with practical observations (“Integration Acceleration,” January/February). Based on my own experience, I’d like to add one more: Don’t nickel-and-dime the extra resources your integration team will need, not only to plan and execute the integration, but also to support the team members’ day jobs during the whole process.

Bring in temps and contractors for such functions as administration and IT support, and try to get people who have worked with the organization before.

C. Jeffrey Smith
Financial Executive, Educator, and Consultant
Epping, New Hampshire