Whistleblower Website, Would you Report Fraud

By now, many of us have read about Lehman Brothers Holdings Inc. ousting a whistleblower just weeks after he raised red flags about the securities firm’s accounting in 2008. Matthew Lee, a 14-year Lehman veteran, was let go in late June 2008 when he disclosed the securities firm was temporarily moving $50 billion in assets off its balance sheet.

Frank Partnoy recently explained as part of a major report of the Roosevelt Institute, “Make Markets Be Markets,” such abusive off-balance accounting was and is endemic. It was a major cause of the financial crisis, and it will lead to future crises.

Its time to find out what really goes on at publicly traded companies to prevent the next financial crisis.

Today, transparency into publicly traded companies is amorphous.  Information is often incomplete, irrelevant or outright incomprehensible.

Employees have the highest success rate for uncovering fraud, according to the latest research by Alexander Dyck, Adair Morse, & Luigi Zingales (Financial Economics, Feb 2007, “Who Blows the Whistle on Corporate Fraud”).

The Investor Protection Act making its way through Congress intends to expand the authority of the US Securities and Exchange Commission, in any action in which it levies sanctions in excess of $1 million, to compensate employees with up to 30% of the amount of the sanctions; i.e., employees share in awards up to $300,000 for every $1 million the SEC levies in sanctions. 

A group of finance and accounting professionals have created an online forum, http://www.zethics.com, where employees can submit information anonymously about the questionable business practices of their company and its executives to share in these awards.

Employees can anonymously disclose information about their employers, providing investors access to information about the quality of the companies within their investment portfolio online from zEthics.com to safeguard their investments.

Like many hard working Americans, my wife and I have lost about 50% of our retirement savings twice in the past decade – the Enron scandal and now the Lehman scandal.

Investors must take it upon themselves to find out what’s really going on inside the company and within the management team by demanding companies disclose information about the business practices of the company and its management team via an independent third party.

Improved internal transparency from an independent third party is the only safeguard against corruption, fraud and poor management.

Improved internal transparency from an independent third party would at least make it possible to:

1) Demonstrate the quality of the business and strength of the management team

2) Determine when the company is disclosing incomplete or inaccurate information

3) Avoid being blind-sided by fraud and misconduct

A sample report from an independent third party is available online at http://www.zethics.com/investors.php.

Corporate governance reforms will remain illusive as long as the interests of management are misaligned with those of the investor; i.e., investors have something to lose.

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About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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