THE HIGH PRICE OF FALSIFYING DOCUMENTS

Peregrine Financial Group’s chairman and CEO, Russell Wasendorf Sr., has been charged with making false statements to the U.S. government, the San Francisco Chronicle reports. Police say they found a statement signed by Wasendorf confessing to nearly 20 years of fraud, including falsifying bank statements using software, scanners, and laser and ink jet printers to create forgeries. Wasendorf admitted to stealing at least US $100 million, but prosecutors say it may be twice that amount.

Two audits conducted by the National Futures Association, a private trade group that’s supposed to keep watch over its members, and another audit conducted by a certified public accountant hired by Peregrine found nothing unusual. No one else has been arrested, though prosecutors say the investigation is ongoing.

Lessons Learned

  • This case demonstrates the dangers of CEO malfeasance combined with lack of effective oversight by regulatory bodies. A resource shortage within the key regulatory and oversight body, coupled with reliance on a self-regulation approach to a particular part of the financial services industry, may have contributed to this fraud going unnoticed for 20 years. Although these types of fraud likely will continue, there are ways to detect fraud earlier and reduce its impact on the business — or perhaps even prevent it.
  • Good corporate governance and management control practices typically involve a policy, if not a requirement, that the roles of CEO and chief financial officer be established and maintained separately. If bank statements were sent to both individuals, then the fraud risk could be mitigated. At the very least, doing so would necessitate collaboration and illegal behavior of two or more senior executives, which is more difficult to conceal over a long period.
  • Regulators, along with those organizations delegated with self-regulatory powers — and certainly corporations — should strongly consider requiring bank statements to be sent electronically and that those records should be considered official representation of the organization’s financial status. Unlike paper copies, electronic records can be made considerably more tamper-proof through encryption and other security methods. Furthermore, whether in electronic or paper form, regulatory and oversight bodies should have the powers to insist — through financial penalties and legal actions — that they be provided with an organization’s financial records timely.
  • To counter a lack of resources, regulatory and oversight bodies could leverage their effectiveness by requiring organizations to send electronic copies of bank statements and accounts regularly. A simple comparison and analysis of these documents can serve as an entry point to unmasking fraudulent behavior at an early stage. The data originating from a large quantity of organizations can be captured and assessed readily to determine unusual trends for further examination. Criteria such as the size of an organization and the value of financial transactions can be used to further prioritize efforts to maximize fraud detection and prevention efforts while conserving oversight resources.
  • Retaining the services of an auditor with expertise in financial fraud and forensic auditing is another effective method to counter fraudulent behavior.

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