The U.S. Securities and Exchange Commission and other regulatory agencies are hotly targeting audit committees and directors. Here are ways CFEs can help them fulfill their responsibilities and prevent fraud in their organizations.
On Feb. 28, the U.S. Securities and Exchange Commission (SEC) charged three ex-directors and audit committee members of DHB Industries for failure to appropriately address a growing fraud in their organization.
Last September, a federal jury convicted DHB Industries CEO David Brooks and Chief Operating Officer Sandra Hatfields for, among other things, multiple counts of securities fraud, insider trading and obstruction of justice. The federal government had accused them of "manipulating financial records to boost earnings and profit margins, and thus inflate DHB's stock price."
Now, the SEC is prosecuting the ex-directors because their lack of oversight allowed senior management to manipulate results and to funnel millions of dollars to DHB's founder and chief executive, David Brooks, to pay for luxury cars, costly vacations, art and prostitution services, according to a complaint filed in a Florida federal court. The SEC accused Jerome Krantz, Cary Chasin and Gary Nadelman of being "willfully blind to numerous red flags" of fraud, according to Robert Khuzami, director of the SEC's Division of Enforcement.
"This massive accounting fraud permeated throughout an entire company," said Eric Bustillo, director of the SEC regional office in Miami. "As the fraud swirled around them, Krantz, Chasin and Nadelman ignored the obvious."
This SEC action is not the first time it has held directors responsible for poor oversight. Just last year, the SEC accepted a settlement from InfoGroup Inc. audit committee chairperson Vasant Raval.
The SEC concluded that Raval had conducted an inadequate investigation into allegations of the CEO's improper related-party transactions. Raval accepted an injunction that included a $50,000 fine and a restriction against serving as a director or officer for five years.
The SEC has increased investigation and prosecution efforts directed at board members and audit committee members specifically. According to the SEC's 2010 Performance and Accountability Report, the agency brought 681 enforcement cases covering a broad spectrum of financial wrongdoing in their 2010 fiscal year. Those enforcement cases have resulted in $2.8 billion in penalties and disgorgement, with many of the financial wrongdoings falling under the general oversight of audit committee activities.
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