It’s well known that a company’s tone at the top is critically important in determining its culture, including whether or not it will act with integrity and ethical values – fundamental elements of effective internal control and risk management. And we know it’s not only the words spoken at the top, but also the CEO’s actions that drive culture. What brings this to mind is the recent conviction of the CEO of fraud detection firm Fraud Discovery Institute. While a conviction of the head of this type of firm might appear unusual though not particularly noteworthy, what’s truly compelling about this news is that the CEO is none other than Barry Minkow.
If you were following internal control, risk management and fraud back in the late 1980’s, you’ll likely remember the well-publicized fraud carried out by Minkow when he led ZZZZ Best Co. Reportedly he started the business at age 16, and took it public with the value exceeding over $200 million. But it turns out he cooked the books and falsified documents to support the fraudulent financial statements. Having been found out, he was convicted and sentenced to a 25-year prison term, ultimately serving a bit more than seven. After leaving prison, he started Fraud Discovery Institute in San Diego to uncover corporate fraud for clients, and took on a role as pastor of a community church. Why would anyone hire his newly formed firm? Well, certainly Minkow could be termed an expert in how to commit fraud, and thus how to prevent it, and having paid his dues to society it’s understandable that he was given the benefit of the doubt in redemption and starting a new and productive life.
It would be nice if this story had a happy ending, but it turns out that in his new firm Minkow reverted to his old ways. Prosecutors claimed that Minkow made false and misleading statements about Miami homebuilder Lennar Corp.’s financial condition to drive down the company’s share price [and] abused his relationship with federal law enforcement agents to get non-public information about Lennar and traded on that information.” And the 45-year old Minkow was sentenced in federal court to a five year prison term.
One could say that “once a crook, always a crook,” but that would be unfair. People do bad things and then turn to the straight and narrow, and have done good deeds in their lives. Nonetheless, when it comes to leading a business, it’s not three strikes and you’re out, but two, or more likely one. The tone at the top and actions of a CEO are too important to trust to anyone with anything other than a background not only of skill and performance, but also acting with integrity and ethical values.