United States Attorney’s Office
Southern District of Florida
July 21, 2011 Press Release

Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and John V. Gillies, Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, announced that defendant Barry Minkow, 44, of San Diego, California, was sentenced today on one count of conspiracy to commit securities fraud, in violation of Title 18, United States Code, Section 371, for his participation in a scheme to manipulate the stock price of Lennar Corporation (Lennar) through false and misleading statements about Lennar’s business operations and management. At today’s hearing, U.S. District Court Judge Patricia A. Seitz sentenced Minkow to five years in prison, to be followed by three years of supervised release. In addition, the Court ordered Minkow to pay $583,573,600 in restitution.

In the United States, Generally Accepted Accounting Principles (GAAP) are required to be used by public companies so that users of the financial statements can properly interpret results. It makes sense to have a set of rules common to all businesses, such that financial statement users can know what various line items and metrics mean.

If companies were allowed to make up their own accounting rules and measures, no one would know what the numbers really mean. And that is precisely what Groupon (GRPN) is hoping will happen when would-be investors look at the company’s numbers.

A couple of weeks ago, I got a call from a nice woman at Marcus Evans, a company that puts on events in a variety of industries. Her talk was scripted, but it sounded good.

I pay a fee to attend an event (they say it is not a conference or seminar, but a “summit”). At this event will be chief legal counsel for Fortune 1,000 companies who are looking for service providers with various specialties. Marcus Evans says they match those executives in need of services with appropriate providers, pre-screening both so that they know it is a good potential match. Each person like myself who pays to attend is guaranteed 8 to 10 face-to-face meetings with these executives. (Which, of course, would be aimed at securing a new client for me.)

Where can employees, outside consultants, and board members look for evidence of override of internal controls? This isn’t a simple list of numbers or documents that must be checked off. Instead, looking for improper override of controls requires looking for red flags that point to something being amiss.

It’s clear that there is a time and place for management to occasionally override a control. Everything in business is not routine, and there are times when special situations require special treatment. It would be silly to prohibit management from ever overriding the policies and procedures that are in place. There has to be guidance in place to direct employees when they may consider overriding controls.

However, it’s important to recognize that the override of controls should be the exception rather than the rule. Employees should be able to circumvent the system only on an infrequent basis, and these instances must be actively monitored to determine if the override process is being abused.

Some companies think they are protected against employee fraud because they have strong internal controls. Often, that’s the case. Good controls mean the rules are followed and the money is properly accounted for.

Sometimes, however, good controls are meaningless. What about the controls over the controls? All the rules and designated procedures in the world are meaningless if management has the ability to override them at will. When these overrides go unchecked, the company is often no better off than if they didn’t have any controls in place.

Indeed, the risk that management will override controls established to prevent fraud and ensure accurate financial statements is great. It is a constant risk as executives are in a position to manipulate numbers and direct employees to aid the manipulation. They can easily fabricate transactions or modify numbers to craft the financial statements to report whatever their hearts desire.

Robert FitzPatrick, an internationally recognized authority on multi-level marketing and pyramid schemes and a court certified expert witness on MLMs and pyramids, details the lies told in MLM in this article, A Disguised Pyramid Scheme: The Non-Retail “Direct Selling” Company:

Instead, the non-retail direct selling schemes present a compelling and very alluring picture to potential recruits that diverts attention from the flawed structure and its disastrous outcome. Virtually all companies of this type in every country they operate in make the same alluring and misleading promises to recruits:

Last week, the Council of Economic Advisers of the Executive Office of the President released its quarterly report on The Economic Impact of the American Recovery and Reinvestment Act of 2009.

The numbers are stunning, to say the least. Our federal government has spend $666 billion to date, with another $106 billion that it is obligated to pay but has not yet paid.