July 23, 2008
Don’t be fooled by accountancy’s invisible ink
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.
But why did SEC settle???
Posted by: Rohit | July 24th, 2008 at 10:23 am | Report this commentI can’t answer that one Rohit.
Posted by: Adam Jones | July 24th, 2008 at 10:49 am | Report this commentThis strikes me as bizarre. There are products on the market that ensure ‘mistakes’ such as this are picked up. Software that highlights changes to spreadsheets - even the white text on white background ’slipup’. Why weren’t they using some form of spreadsheet management system? Everyone knows that spreadsheets are fantastic tools for business, but they need controls in place to ensure that changes made to them are monitored and controlled.
Posted by: Sarah Seddon | July 24th, 2008 at 2:01 pm | Report this commentThis is bizzare because the results of what was produced should have been relevant, rather than the way the speadesheet was configured.
Posted by: Ali | July 24th, 2008 at 3:40 pm | Report this commentSpreadsheet Management software is available from Prodiance to help companies avoid these type of problems. The software can detect and report on Invisible Cells and Hidden Rows and Columns of data, report on “unusual” changes to key spreadsheets, and discover them on your network (even on employee desktops) and assign such spreadsheets a High Risk rating.
Posted by: Eric Perry | July 24th, 2008 at 5:16 pm | Report this commentEric, I would normally remove a comment like that for being a naked plug for the commenter’s business. But in this case, I reckon it has helped the topic along so shall be lenient!
Posted by: Adam Jones | July 24th, 2008 at 5:25 pm | Report this commentThe first thing you get taught as an auditor is that when you are given a printout of a spreadsheet, you should use your calculator and check it adds up. If the schedule is too long to do that, you should ask the company for the excel file.
Posted by: Thierry Lambert | July 25th, 2008 at 9:26 am | Report this commentThis is a simple yet effective way to commit fraud in this high spreadsheet usage era!! I think Auditors need to learn from it and goto basics.
Posted by: Anuj Sharma | July 25th, 2008 at 11:39 am | Report this commentWho on Earth uses hardcopies nowadays? There are far more sophisticated ways of fudging a spreadsheet.
Posted by: Ian Stuart | July 25th, 2008 at 12:48 pm | Report this commentYou can find ways to avoid spreadsheet risk if you look at the non-profit European Spreadsheet Risks Interest Group (www.eusprig.org).
EuSpRIG offers Risk Managers independent, authoritative & comprehensive information on Spreadsheet Risk Management. You can see published peer-reviewed conference proceedings on Cornell University’s moderated scientific repository www.arxiv.org
Some relevant papers:
On the problem of Spreadsheet Errors: http://arxiv.org/abs/0802.3457
On the Impact of Errors: http://arxiv.org/abs/0806.3536
Protecting Spreadsheet against Fraud: http://arxiv.org/abs/0801.4268
On the Scale of the problem: http://arxiv.org/abs/0709.4063
Testing Spreadsheets: http://arxiv.org/abs/0807.3187
Grenville Croll, EuSpRIG Chair
Posted by: Grenville Croll | July 25th, 2008 at 1:07 pm | Report this commentIan, when I worked at a Big Four accounting firm (tax, not audit), the culture from the manager level up was always on hard copies, always purportedly on the big picture. I sometimes got the feeling they felt they were entitled to be so far removed from the actual work because of their position on the totem pole. At any rate, the only hope for quality control on spreadsheets was in junior level peer review, and I imagine that’s true at a lot of firms.
Posted by: Chris Wilson | July 25th, 2008 at 2:18 pm | Report this commentGrenville, thanks for those links.
Posted by: Adam Jones | July 25th, 2008 at 5:30 pm | Report this commentYet another example of why firms need to implement and control accounting and reporting systems that actually do accounting and reporting. The case here, most probably, is of yet another firm that cut corners on their system implementation/process and accepted having to finish the (reporting, etc.) job in Excel. There really is no reason to do any formal financial statement publication via Excel. Seriously, a $150 off the shelf accounting package can provide both reasonable reporting AND an audit trail.
Posted by: G. Moore | July 25th, 2008 at 6:29 pm | Report this commentAdam:
Most auditors / CFOs and their teams use invisible ink - a fact I discovered recently, mostly ued for validation reasons and they leave it there for further analysis they may want to do but to not confuse others with a barrage of numbers.
In fact an experienced hand receiving a spreadsheet from an auditor / finance team will first select the whole spreadsheet to find out the invisible ink before proceeding !!!!
Posted by: Kimi | July 26th, 2008 at 6:27 am | Report this comment[…] out the spreadsheet An interesting item - Accountancy’s invisible ink, from the Financial Times Management blog on the opportunities which may or may not be presented […]
Posted by: Whiting out the spreadsheet « The Inquiring Mind | July 27th, 2008 at 4:27 am | Report this commentWhat is also bizarre in such cases is that what happened with the basic rule of the double entry?
Presumably if a bogus entry is logged in a particular journal, say expenses, there has to be a corresponding debit or credit somewhere else.
Otherwise the whole system would come out of balance or a basic check on a bank account or debtors / creditors end of period position would flag an error…
I always check this sort of things to get comfort on accounts integrity.
Posted by: Andrei | July 27th, 2008 at 2:52 pm | Report this commentA boss I had early on taught me the knack of using a calculator to quick-check whether things added up, and to look across time periods to see if there was anything possibly amiss.
While you wouldn’t expect a corporate level CFO for a large firm to have to do this, it’s a way of not only catching “errors” but also of demonstrating to the staff that you’re going to be having a close look at their figures.
I have never found intentional errors or fraud this way, but stopped more than a few potentially embarrassing gaffs from going out and eventually being caught by someone else.
What went on in this case certainly would raise red flags about whether these weren’t intentional misdeeds.
Posted by: JT Fisher | July 28th, 2008 at 10:18 pm | Report this commentDo you have to use “bean counters” to degrade accountants?
Posted by: r j realo | July 30th, 2008 at 2:56 am | Report this commentrj: you are right. Offending phrase removed from post. Apologies.
Posted by: Adam Jones | July 30th, 2008 at 9:31 am | Report this comment