We’re back to a fraud at the top, but again with a couple of twists.
Swisher Hygiene was a sanitation company. They sold cleaning supplies and chemicals for restaurants and other businesses. Essentially a lot of kitchen and bathroom cleaning. In 2010 the company went public on the Toronto Stock Exchange via a reverse takeover.
Almost immediately, Swisher’s CFO Michael Kipp engaged in a scheme to smooth earnings. Commonly called Cookie Jar Accounting or Cookie Jar Reserves, this scheme seeks to manipulate earnings to meet a specific target like net income or EPS. It is often used to smooth earnings and consistently meet earning requirements. In a typical scheme companies pad reserves in good years and deplete them in down years to present a smoother earnings line.
The problem with Cookie Jar Accounting is there can be a fine line between a legitimate adjustment of reserves and fraud. Reserves typically require some form of judgment which is why they are ripe for manipulation. It is not uncommon to see companies fined by the SEC for violations related to reserves without those violations resulting in fraud charges.
Assisting Kipp was Joanne Viard, a CPA and the Director of External Reporting. Kipp was also in line for an $88k bonus if the company hit earnings targets. So far, this sounds like straightforward financial statement fraud. The financial statements are alleged to have been manipulated by as much as $96 million over several years.
The first unusual piece here is how they got caught. Swisher’s Controller pushed back on a suspicious request. From the Justice Department’s report:
“The accounting fraud scheme began to unravel when Swisher’s then Controller pushed back on making a fraudulent entry during the year-end close. The Controller wrote in an email, “I’ll run it by BDO [Swisher’s auditors] so we’re on the same page,” to which Defendant Kipp responded, “You’ll run it by me since I’m the chief accounting officer. I’m out of patience with this.” Later, Kipp fired the Controller for his persistent refusal to book the fraudulent entry. Swisher’s Audit Committee learned of the Controller’s allegations and promptly commissioned an independent internal investigation.”
Pushback like this that leads to identifying fraud is pretty unusual.
The second unusual piece is that I was doing some ERP consulting there at the time the fraud was identified. We were pretty deep in the weeds so it wasn’t clear at first what was going on. Imagine the largest conference room in your organization stuffed with accountants and auditors all billing at the highest hourly rate you’ve ever seen. They are there before you arrive in the morning and still there when you leave at night. Fraud is expensive, and the clean-up after fraud is expensive as well.
I saw some pretty messy parts at Swisher around bank reconciliation and some fixed asset policies, but we were focused on fixing processes, not reserve accounting.
Ultimately Kipp and Viard pled guilty and the US assets of Swisher Hygiene were sold to competitor Ecolab.
Per the Association of Certified Fraud Examiner’s annual report, having an option for whistle-blowing, a hotline, website, something is the number one way fraud is ultimately caught. We saw this with the $8 million fraud at ING and All the Queen’s horses. It was ultimately a big piece of Enron’s unraveling as well. At Swisher, we had fraud at the top and collusion. That’s enough clout to bypass a lot of controls, but someone still took their fiduciary responsibility seriously and did their job.
That is always the hard part about fraud at the top. If you see it, expect to lose your job, either because your report it, or because the fraud ultimately brings down the company. There is a pretty good argument that if you think you see fraud at the top, go get another job.