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Even with Sarbanes Oxley, Arrest of Documentary Star Shows Accounting Fraud Remains Alive and Well

I admit it. I’m a documentary junkie. More specifically, I love documentaries about entrepreneurs and startups and there are quite a few available these days. Just check Netflix, Hulu or other Pay-Per-View options and you’re sure to find several. My favorites are Startup.com, which tells the story of two childhood friends who launched the now defunct govWorks and Startup Junkies, an 8-episode series highlighting the struggles of launching Earth Class Mail. While I love both, a softer spot remains for Startup.com.

In this film, you can see the irrational exuberance and lack of communication within the team, coupled with the expected passion and hard work, which eventually lead to the demise of the venture. As the credits rolled, my heart sank just a bit, partly because of the bittersweet ending and partially because, as an entrepreneur, I can identify with the excitement and challenges that come with putting your heart and soul into building a venture from scratch.

Fast forward to today. While govWorks is all but a distant memory, one of the founders, Keleil Isaza Tuzman, has been involved in a number of ventures since his first company folded. Most recently, Mr. Tuzman was arrested late last year and charged with market manipulation and accounting fraud in relation to KIT Digital, a New York-based video and software services company he helmed as late as 2012.

According to the Wall Street Journal, September 9, 2015:

Mr. Tuzman engaged in a scheme with an outside hedge fund to artificially inflate the share price and trading volume of KIT Digital shares. It also alleges that both Messrs. Tuzman and Smyth falsely inflated KIT’s sales by recognizing revenue for products the company hadn’t fully delivered and by using the company’s own cash to pay off customer invoices that were uncollectible.”

The article continues by describing how the company raised $250 million via stock sales and were well received by Wall Street analysts, particularly those involved in the stock sales.

One of the obvious issues here is that accounting fraud can occur at any level. Segregation of duties is fine, but if the boss instructs staff to manipulate the books and ultimately report phantom numbers, the SEC will get involved, but this is usually after the fact. Sarbanes Oxley has certainly helped put the lid on the potential for certain kinds of accounting fraud, but there really is no foolproof way of completely removing risk and preventing it completely.

41803629_mlFraud prevention really begins with professionals committed to integrity and ethical behavior. Even with a dozen more laws and guidelines, a dedicated fraudster will always find a way to circumnavigate the system.

Of course, everyone is innocent until proven guilty, so we will see what happens to Mr. Tuzman after the dust settles and, if found innocent, whether he’ll be inclined to launch yet another venture. If so, hopefully there will be stronger financial controls in place.

For additional insight on understanding and avoiding internal fraud, register for the Free webinar: Detecting and Preventing Accounts Receivable Fraud in Your Organization on January 27 at 2:00 PM with guest Chris Doxey.

Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.

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