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Fraud's Many Helpers

By Carrie Johnson
Sunday, March 20, 2005; Page B01

Somewhere beyond the lush suites once occupied by such fallen corporate titans as Bernard J. Ebbers, Kenneth L. Lay and Richard M. Scrushy sat dozens of underlings who found ways to inflate profits and bury expenses -- the essence of the accounting schemes that cost investors billions of dollars in the late 1990s and left once successful corporations in tatters.

Unlike the now-convicted Ebbers and the indicted Lay and Scrushy, the names of these formerly loyal subordinates remain essentially unknown to anyone other than their colleagues and neighbors. After following these corporate fraud trials for two years, however, I see an important pattern to these foot soldiers' actions that I think deserves greater scrutiny. Understanding their behavior -- and the pressures that led them to commit their crimes -- may tell us how seemingly disparate companies in Jackson, Houston and Birmingham resorted to similar forms of deception and trickery to preserve the empires their chief executives had built.

The sheer number of subordinates who face criminal charges for these accounting frauds belies the myth that some of the biggest schemes of the past decade were carried out by a small group of devious executives. Rather, as the employees themselves recount under oath, dozens of people colluded to hide misdeeds from auditors and investors. At Enron Corp., nearly 30 face criminal charges. At HealthSouth Corp., prosecutors have indicted 18 individuals who allegedly misstated their companies' finances using computer software systems, prepared phony documents and made improper entries on corporate accounting ledgers. Without their help, the frauds probably could not have taken place.

Testimony at the various trials has shed light on a particularly vexing problem for corporate governance experts, prosecutors and investor advocates who want to break the back of corporate fraud: Why would highly motivated workers take part in schemes that jeopardized their careers, their marriages, their standing in the community, and call into question their most basic ethics?

It's hard to pigeonhole the parade of star witnesses who have agreed to plead guilty and implicate their former bosses for a shot at a more lenient prison sentence. Some are jittery, some are tearful, some are headstrong as they take the stand to recount the inner workings of plots designed to meet ambitious Wall Street earnings targets, keep stock prices climbing and trigger the payment of tens of millions of dollars in bonuses and other rewards.

Yet their biographies offer some clues. Many grew up in or near the towns where the company and its founders reigned supreme. Working at the area's most prominent business conferred instant status in towns such as Coudersport, Pa., the former headquarters of the cable TV giant Adelphia Communications Corp. (whose 79-year-old founder was convicted last year of fraud); Birmingham, home to Scrushy's HealthSouth Corp., and the Jackson, Miss., offices of Ebbers's WorldCom.

The words and actions of a surprising number of these subordinates suggest that in many of the companies where fraud began to flourish, workers vowed loyalty not to ethical business practices or even to the company, but to the charismatic leaders who came to personify their businesses.

Typically, both company and founder assumed a larger-than-life presence in the community: The names of HealthSouth and Scrushy graced hospital buildings and university facilities around Birmingham. The Rigas family that started Adelphia in 1952 paid for treatment of sick local residents who couldn't cover their medical bills. WorldCom's Ebbers, convicted last week on fraud and false reporting charges, taught Sunday school and donated millions to local causes. So blowing the whistle meant upsetting an entire community, not just the CEO.

The details of these late 1990s frauds vary from company to company, but the general theme is remarkably similar. Someone at the top level, worried about lagging revenues or sagging profits, would ask accounting wizards to find creative ways to meet targeted goals. The process of "hitting the numbers," "making the numbers" or "helping the numbers" (the preferred euphemisms for accounting malfeasance, according to testimony thus far) usually would start as a temporary, if troubling, one-shot deal. Tinkering with the books for just one quarter, however, often morphed into a years-long project as gaps between actual revenue and reported sales snowballed beyond the control of top executives and subordinates in the accounting and finance units.

Why didn't more employees just say no? Why did fraud so often prevail over ethical principles? Central questions, and ones that aren't easy to answer without examining the cultures that prevailed at these high-flying, fast-growing companies.

Certainly, the rewards for working in the corporate pressure cooker proved addictive. Mid-level executives, often promoted to positions beyond their expectations and formal qualifications, reaped outsized salaries in exchange for going with the program.

A few weeks ago, HealthSouth's William T. Owens captivated a courtroom audience in Birmingham with his account of his climb up the corporate ladder. Owens, a high school dropout, eventually returned to school and graduated from Alabama's Troy State University. During his 17 years at HealthSouth, one of the country's biggest operators of medical rehabilitation centers, he rose from accounting staffer to finance chief to interim CEO.

Owens's unflagging confidence in his own ability to outthink everyone, including aggressive defense lawyers, wavered just once during 11 days on the witness stand -- when prosecutors asked what had become of his marriage. He grimaced, and said that his wife of 28 years had divorced him after finding out that he had been concealing the fraud and deceiving her for nearly a decade. He has pleaded guilty to wire fraud, conspiracy and false financial reporting charges, and is awaiting sentencing.

The stakes for former WorldCom accounting department manager Betty L. Vinson were not quite as high. Vinson supported her husband and teenage daughter in Madison, Miss., on her WorldCom benefitsand a $50,000 annual salary. She also reluctantly helped execute accounting maneuvers that helped the telecommunications company inflate profits by nearly $11 billion.

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