Petters: red flags unheeded
Petters Co.: Many watchers, but no one watching
Excerpts:
Among the red flags that went unseen or unheeded: fake inventory statements, dummied invoices, millions of dollars wired to an office next to an Excelsior car wash, suspicious bank account activity and Petters himself, a flamboyant executive trailing decades of lawsuits over bad debts.
But apparently authorities suspected nothing until a Petters executive, Deanna Coleman, approached federal investigators in September to accuse her longtime boss of fraud and to cut herself a deal.
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Petters Company Inc., the investment arm central to the alleged fraud, was run by a small group operating separately from the Petters Group Worldwide holding company. But they shared the same building in Minnetonka, and Tom Petters was their sole director. Both companies were placed into a receivership last month after a federal judge found probable cause to believe that more than $3 billion had been bilked from investors.
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What is known is that key Petters companies appear to have been operating without the most basic of business documents -- the certified financial statement, or annual outside audit. A certified financial statement is prepared by an outside public accounting firm. It's considered a basic stamp of credibility. Privately owned businesses aren't required to have them, but financial professionals insist that no prudent investor or lender would do business with a company lacking them.
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The professional rules of conduct governing both in-house accountants and lawyers don't require them to go outside the company to report illegal activity if they see it. The rules simply require them to report wrongdoing up the internal chain of command. Nonetheless, Neil Hamilton, who teaches legal ethics at the University of St. Thomas law school, said accountants and lawyers have a fiduciary duty to the public.
Comment: Board members of private organizations (churches, non-profits, and private businesses) should demand full auditing of all financial records. For churches: full audited financial statements (income and expense and balance sheet) should be provided members; For non-profits: full audited financial statements (income and expense and balance sheet) should be provided to supporters / donors; etc.
