Anyone who oversees accountants would do well to read details of a freshly-settled fraud complaint in the US.

The SEC had accused Scott Hirth - a former divisional CFO at ProQuest, a producer of electronic databases of archived information - of fraudulently boosting recorded revenues and under-reporting costs.

Without admitting or denying the allegations, Mr Hirth has agreed to pay a fine and be barred as a company director. ProQuest, which is now known as Voyager Learning Company, has also consented to settle SEC claims of lax controls without admitting or denying the claims, but it does not have to pay a fine.

Two things in the 24-page complaint filed by the SEC struck me as particularly fascinating. The regulator alleged that Mr Hirth had covered up his spreadsheet manipulation by using hidden rows and entries in white text on a white background.

That’s right: we’re talking about the accountancy equivalent of invisible ink.

The SEC claimed that Mr Hirth - whose lawyer declined to comment this afternoon - exploited the fact that accounting checks used printed copies of spreadsheets rather than on-screen versions. It alleged that Mr Hirth used a “hide” function on his spreadsheet program that meant certain fictitious entries were invisible when printed.

In another spreadsheet, the SEC claimed, the company’s running tally of expenditure on commissions was distorted by a $4.1m cell entry located well away from the other figures. Because it was in white font on a white background, this entry - which had no basis, according to the SEC - could not be seen when a hard copy of the spreadsheet was printed.

Auditors and CFOs: you have been warned.

July 23, 2008 5:14pm in Finance, Governance/CSR | Comment