Tuesday, August 23, 2005
The U.S. Attorney's Office for the Northern District of Ohio announced that it filed a securities fraud information against Brian Haylor, a former controller in a division of the Ferro Corporation. According to a press release (here):
[F]rom March 6, 2003, through June 4, 2004, Haylor committed securities fraud by causing Ferro to prepare and file false quarterly and annual reports with the Securities and Exchange Commission. Specifically, the defendant is alleged to have made false entries to make Ferro’s earnings appear higher and its debts to appear lower. These entries were made in several of the company’s accounts including: accounts receivable, unrecorded liabilities, and consignments payable as well as the company’s inventory accounts. Haylor is alleged to have made these entries so that the company’s actual results would appear to have come close to the company’s previously forecasted results. This was sometimes referred to as "closing the gap."
Ferro first disclosed the accounting problem in July 2004, and conducted an internal investigation that resulted in the company identifying a "former subordinate divisional employee" as responsible for the misstatements, which required a $10 million adjustment (see Jan. 18, 2005 press release here). Apparently, Haylor is the unidentified employee, and the filing of an information usually means that the defendant will enter a guilty plea in the near future. The case is a good example of the pressure on mid-level managers to meet financial targets, and how the use of seemingly minor accounting shortcuts to meet expectations can turn into a crime. (ph)