More than $50 million in venture capital down the drain. Over 200 people out of work. And two Internet executives -- both fathers -- going to federal prison.
That's the ugly aftermath of Entellium. Last month, former CEO Paul Johnston and former CFO Parrish Jones were sentenced to two and three years in prison, respectively, for inflating revenue figures over a period of four years at the Seattle software company.
The case, which has left a lingering black eye on the Seattle startup community, has raised questions about the role of the board. Why didn't directors discover the fraud sooner? Where was the audit? And when the board's audit requests were denied, why didn't they push harder?
Corporate attorneys in Seattle say the case has served as a wake up call for directors at privately-held companies. And they say it has reinforced the importance of financial oversight and audits.
"I find it difficult to understand how something like this could happen if the board is properly executing its oversight function," said Stephen Graham, an attorney at Fenwick & West in Seattle. "You want to be pretty darn sure of yourself before you decide that you are not going to require audited financials. And if you have a situation where you have asked for them and you are not getting them -- and this goes on for some period of time -- isn't that a red flag? If this is any kind of a watershed moment, I think it is more of a vivid reminder that boards have real jobs and jobs that need to be taken seriously."
James Judson, an attorney at Davis Wright Tremaine, agreed.
"The key is never to back off from vigorous inquiry," said Judson, who sits on a number of public and private company boards. "Management will sometimes regard board persistence as insubordination, but nonetheless, all information must be thoroughly vetted. Popularity is not required."
The responsibilities at public and private company boards are virtually the same, said Graham. And he said it is surprising how often directors don't take the job seriously.
"Broadly speaking, there are many, many directors out there who see sitting on a board as more of a privilege than a job," he said.
But no matter how hard directors work, Graham said they still can fall victim to fraud.
"With any relationship there is some element of trust, and if you are dealing with people who are bent on defrauding you, more than likely that is going to happen," he said.
That was a key argument in the Entellium case. Carl Blackstone, the Assistant U.S. Attorney, argued that Jones and Johnston abused their positions of trust by lying to the board.
"When they've got the CFO in their board room telling them these are the revenues of the company, do you really think the company needs to say: 'Well, maybe the CFO is lying to me?' Of course, not," said Blackstone. "They trusted him, they relied on him and he abused that trust."
Defense attorneys for Jones countered in court documents that the responsibility fell on the shoulders of the board, including representatives of Ignition Partners which held two seats.
"If any of the investors had even glanced at Entellium’s financial statements, much less completed an audit, the misrepresentations would have been immediately exposed," they said.
more
No comments:
Post a Comment