I was just reading that another fraud in the financial arena went undetected for over 20 years. This time Peregrine Financial Group (aka OFG Best) filed Chapter 7 bankruptcy on July 7, 2012, after being sued by the US Commodity Futures Trading Commission. The founder, Russell R. Wasendorf, Sr., who is accused of misappropriating at least $200 million, tried to commit suicide on July 9th, but failed in that attempt. Seems Wasendorf couldn’t get anything right.
In a signed statement, Wasendorf admitted that he used Photoshop, Excel, scanners, laser and ink jet printers to produce convincing forgeries of almost every bank account. Over the years he had consolidated several bank accounts into one account at US Bank, which made it even easier to conceal the fraud. He was the sole individual who had access to that account.
Wasendorf’s plan seemed fairly elaborate. He had all bank statements delivered to him directly. He also opened a post office box in the name of US Bank and used this address on the counterfeit bank statements he created. When auditors mailed the confirmation forms to the address on the statement, he received them and sent back to the auditors the signed document indicated the erroneous balance.
Now, the question arises as to why the auditor(s) didn’t catch the fraud. While it was a pretty elaborate plan, the auditor(s) should have been somewhat concerned that there was a lack of segregation of duties over the bank accounts. Typically a company with $200 million in assets would have several people performing different functions, trying to mitigate any potential fraud.
Now you are wondering why I used the (s) after the word auditor above. Well, from my readings it appears the accounting firm auditing Peregrine was a one-person firm run out of the accountant’s home in Glendale Heights, Ill., a Chicago suburb.
Interesting that a $200 million business is audited by a one-person firm; does this sound somewhat familiar? It should – in the Bernie Madoff scandal the audit firm from New York was a three-person firm.
If someone is going to go to the lengths that Wasendorf or Maddoff went, detecting fraud will be very difficult; couple that with using a small firm and you have a recipe for disaster.
There are three things that an investor can do:
- Find out who the audit firm is
- Find out the size of the firm and how they performed on their last peer review
- Stay away from funds where the managing member’s last name ends in F.