In looking at the situation overall with this company, there are many red flags for fraud that have popped up. These must be accounted for and dealt with in order to have a full understanding of what risks the company faced during that time. While some of these red flags are worse and more consequential than others, they all contribute to the profile of a company that should not have been trusted with new investment money during this time, and a company that was quickly careening toward an edge in terms of its financial viability.
The first red flag for fraud came as a result of the hiring and firing processes in the accounting department. It is typical in organizations when fraud is taking place for both the accounting department to get smaller and for leadership to exercise more control over this department. This surely happened in the instant case. Importantly, the number of employees were cut down in a cost-cutting measure. While cost-cutting measures are normal, eliminating almost all of the people that would otherwise keep watch over the company’s finances is a sure sign of a CEO who was looking to protect himself on the back end. In addition to that, having only two people around—and two people who the CEO had a close relationship with—is another sign that something wrongful was afoot. It becomes clear looking at the bulk of the evidence that an intentional effort was undertaken to ensure that the only people who had access to the books were not only people who were friendly with the CEO, but also people who could be closely and tightly controlled by the CEO (Sheridan, 2016). This is incredibly problematic at the end of the day.
Another of the potential areas where a red flag for fraud may be presented comes in the way in which the two people in the accounting department are so different. Mason, it seems, has a different lifestyle and does not even work much. That she has been bragging about more wealth and more trips makes one wonder how she is getting that money. This could be a red flag either for embezzlement or that she is being paid in order to keep quiet about the things that are happening within the company (Iyer & Samociuk, 2016).
Another major red flag is the fact that expenditures on travel for executives went up while the company was in an austerity period (Wells, 2017). While it would not be unusual for the expenditures to go up, it would be unusual for this to happen in this specific way while the company was also laying people off. Given that the trips were being taken to New Orleans and the person who had just come over to the company was the former CFO of a casino in New Orleans, there are other red flags raised. Gambling is more prevalent in Louisiana, so this is not necessarily a pressing concern. However, it does raise some reason for concern, and it can be considered a red flag when people take into account the total circumstances surrounding the expenditures.
That the CEO also had another company that went bankrupt during this time is a red flag. It is not necessarily a problem that a person associated with two companies has one go under. However, this does raise questions as to how he was using this company’s resources in light of the struggles he was having. Overall, every single factor may be benign. However, when they are all taken together, one can see the major problems that exist and each one becomes more sinister when it is actually put into that context all together (Baader & Krcmar, 2018).
One of the internal controls that was missing and must be corrected is the nepotism policy. There is a lack of corporate governance that allows the CEO to make any decision he wants to make in regard to hiring in critical positions. Without this sort of internal control, it is likely that the people who would otherwise step up to protect will not be there.
One of the potential explanations for the shortfalls in the three mentioned years is impropriety on the part of employees and executives. Given the lavish spending and the lack of cultural controls on the company, it would have been easy for individuals to spend money without the notice of the accounting department. This amount could have easily been lost due to irregular and irresponsible spending.
If Odom is going to prevent these problems from happening in the future, he is going to need to put in place a culture of accountability. This will need to start with the HR department and principles, and it can flow down to the rest of the company. Likewise, having an oversight committee to ensure that the recommendations of accountants and consulting firms are taken seriously would help the company.
- Baader, G., & Krcmar, H. (2018). Reducing false positives in fraud detection: Combining the red flag approach with process mining. International Journal of Accounting Information Systems.
- Iyer, N., & Samociuk, M. (2016). Fraud and corruption: Prevention and detection. Routledge.
- Sheridan, T. A. (2016). Managerial fraud: Executive impression management, beyond red flags. Routledge.
- Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection. John Wiley & Sons.