One Whistleblower's Story: Losing a job, but not losing hope

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

You might eventually have to make a tough decision that could jeopardize your job and disrupt your life.

Let's say you find an accounting regulation violation that your organization might have ignored for years. You bring your concerns to your boss who agrees you've discovered a problem. Other accounting department staff members concur until they figure out the restatement costs. You stew over this and realize that your organization is breaking the law.

You secretly report the violation to the U.S. Securities and Exchange Commission (SEC) and the audit committee of your company's board. Somehow your boss finds out and sends an email to the accounting department's executives. The attorneys review and decide that the company is in compliance. The SEC decides not to investigate the case. You lose your job and your hope.

This is the story of Tony Menendez, CFE. Except he never lost his hope. "In 2005, I was asked to approve a bill-and-hold sale [at Halliburton], and it was at least six years after the SEC issued SAB 101," Menendez says during a recent Fraud Magazine interview. This Staff Accounting Bulletin describes regulations on revenue recognition in financial statements.

He says unassembled equipment wasn't even ready to be shipped to a customer. "Halliburton was holding the equipment in anticipation of performing future oil field services for its customer," he says. 

Menendez shared his findings with his bosses, and they initially agreed with him. But they later backpedaled when they realized that correcting the accounting would've required a costly and embarrassing restatement. Menendez went to the SEC, which eventually decided it wouldn't pursue the case. A Halliburton internal investigation cleared the company. Menendez's boss outed him to the company in an email. Halliburton stripped him of many of his duties and banned him from meetings. Colleagues ostracized him. Menendez left Halliburton in 2006 and brought a whistleblower claim under the anti-retaliation provisions of the Sarbanes-Oxley Act.

In September 2008, an administrative law judge determined that Halliburton hadn't retaliated against Menendez. Menendez then represented himself in appealing the case to the Administrative Review Board (ARB). In September 2011, the ARB overturned the original trial judge. Halliburton appealed to the Fifth Circuit Court of Appeals, but the panel ruled that the company had retaliated against Menendez for blowing the whistle. After almost nine years, he'd won his battle.

"The stigma of whistleblowers hasn't changed nearly enough," Menendez says. "As long as employers see whistleblowers as a rare breed to be feared instead of individuals who add great value to the working team as a whole, it can be hard for them to prevail, and society as a whole bears the greater risk."

The ACFE will award Menendez the 2016 Sentinel Award for "Choosing Truth Over Self" at the 27th Annual ACFE Global Fraud Conference. Read more about Menendez's story in the latest issue of Fraud Magazine.

My Lunch With Andy Fastow

GUEST BLOGGER

Emily Primeaux
Assistant Editor, Fraud Magazine

It was on a hot, muggy day in Singapore, at a corner table in Beijing Number One — one of the many restaurants in the Marina Bay Sands Hotel mall — that I sat down with Andrew Fastow, former Enron CFO, to talk about one of the most infamous fraud schemes of the past 15 years. We were the only ones in the restaurant — just two unassuming people in the corner of a traditional Asian eatery. Andy asked if I’d be interested in sharing a whole Peking duck. When in Singapore, right?

While we waited for our roasted duck, I pulled out my two recorders, set them on the table and said, “Now I know you’re typically against being recorded in any way, but I have to record this so that I quote you accurately. Are you comfortable with this?” Andy looked me in the eye and replied, “That’s fine. I trust you.”

Trust.

What a short and seemingly simple word. It can be tough to gain and very simple to lose. Trust is present every day in so many aspects of our lives. We trust our significant others to fulfill their promised duties. We trust our employers to pay us the amount we’re owed and on time. Many of us innately believe people will make just and ethical decisions, no matter how hard.

And here in my little corner of Singapore, I was about to pry into the unsavory parts of his past. I was going to poke and prod and ask him to reveal things that, until this point, he’d never truly opened up about. Sure, he’s spoken at conferences, but I had free reign to delve into the true machinations of the Enron scandal and for the first time he didn’t have time to completely prepare.

In his interview with Fraud Magazine, Andy explained that he tried to technically follow the rules, but he also undermined the principle of the rule by finding the loophole. "I think we were all overly aggressive,” he said. “If we ever had a deal structure where the accountant said, 'The accounting doesn't work,' then we wouldn't do those deals. We simply kept changing the structure until we came up with one that technically worked within the rules.” He now calls his machinations fraud.

“I was the gatekeeper. I should have been making the tough calls and I didn’t. I just abdicated,” Andy told me. “We had senior executives, like myself, who were doing deals that sent a bad ethical message.”

To read the full interview, visit Fraud-Magazine.com.

The Art of Illusion: Look for What's Not on the Page

SPECIAL TO THE WEB

ACFE Regent Bruce G. Dubinsky, CFE, CPA, CVA; and Tiffany Gdowik, CFE

“The essence of lying is in deception, not in words.”
— John Ruskin 

Extrapolating the words of John Ruskin, a 19th-century British social thinker, I often say, “It’s not what’s on the page that matters; it’s what’s not on the page that matters.” As fraud examiners, we have been taught to gather documents, review information, interview subjects and then draw our conclusions. While that approach will detect the simplest of frauds, it won’t detect the type of complex financial frauds that are increasingly making headline news.

I’ve worked on some of the world’s largest frauds — including the Bernie Madoff Ponzi scheme, Parmalat, Lehman Brothers and International Brotherhood of Teamsters. In the Lehman Brothers case, the company used “accounting gymnastics” to manipulate the company’s financial statements during the 2005-2008 financial meltdown — the most devastating since the Great Depression.  

LEHMAN'S ILLUSION

In 2008, Lehman Brothers’ shaky balance sheet and falling profits left the firm in dire financial peril. It desperately needed to create the illusion that it was healthier than it actually was. Lehman used what appeared to be a normal financial instrument in the banking world — a repurchase agreement (a repo) — to book billions of dollars of transactions. A repurchase agreement is a form of short-term borrowing for banks and other dealers typically using government securities. The bank sells the government securities to an investor (many times another bank), usually on an overnight basis, and buys them back the following day. In Lehman’s case, the company did it to exploit an accounting rule that was meant to give principled guidance to determine when a repo was a true short-term financing method versus a sale of a financial instrument. The latter desired treatment as a “sale” allowed Lehman to slyly portray its financial condition as rosy when it wasn’t.

Interestingly, investigators didn’t discover the illusion created by Lehman by looking at what was on the page (i.e. the entries in the accounting system). The accounting entries, which seemed straightforward, generated little to no alarm. The debits and credits were to the proper accounts. The explanation accompanying the entries also seemed normal. In fact, a review by even the most skilled auditor or fraud examiner would, in and of itself, have revealed nothing. Rather, investigators exposed the company’s deceptive behavior by looking at what was literally not on the page. The key to uncovering the ploy was to first obtain an understanding of what Lehman’s financial perils were at that time.

Lehman had unusually high amounts of leverage (debt to finance its assets) on its balance sheet, and the public markets were responding negatively. The company spent a considerable amount of time and effort trying to calm the markets during its investor calls. So, the first “red flag” came in the form of a question: Why was Lehman spending so much time focused on de-levering its balance sheets? Its access to public capital was critical to its continued survival. With investor panic running rampant, it had to create the illusion that it wasn't a house of cards but rather a solid financial institution with a sound balance sheet.

So how did Lehman create the delusion? It simply used the chameleon approach: make something that’s really one thing look like something else. Lehman took repos that were really short-term loan transactions and made them look like they were sales of financial product inventory (e.g. U.S. treasuries and certain equities). By knowingly exploiting that U.S. accounting rule and specifically structuring the repos to fail the requisite treatment as a repo financing, Lehman was able to disguise itself as a financially healthier institution.

Read the full article on Fraud-Magazine.com.