News agencies reported today that Walter Forbes, the former Chairman of Cendant, took the stand yesterday at his retrial on fraud charges. This story is long played out in the press and has been called the largest accounting scandal of the 1990s. The gist of the story is straightforward. Forbes denies charges that he inflated income at his company (CUC) prior to its 1997 merger with HFS. (CUC and HFS then formed Cendant.) According to Bloomberg News, “Cendant shares lost $20 billion in value in 1998 after the company disclosed the prior accounting problems at CUC.”

Yesterday Forbes testified that he was not involved in daily operations at the company (CUC), and that he relied on subordinates to prepare accurate financial statements. Isn’t that what they all say? Look, I am not working on this case. I don’t know all of the details. I don’t know Forbes and I never worked at Cendant. I am even willing to believe him. But, my experience in interviewing former employees who worked for people in senior leadership just like Forbes says that I should trust my gut. It’s almost impossible for me to believe that he was not involved in daily operations, did not see the numbers and did not know of any manipulations taking place.

At Caveat, we spend a lot of time working on matters that require identifying and interviewing former employees. In cases where the accusations are remarkably similar to those leveled against Forbes, we find over and over again that senior leadership is almost always involved in the day-to-day operations of the company. We learn this from former employees. We have conversations with people who used to work at the company. Administrative Assistants, middle managers, and VPs all offer a wealth of knowledge. And, it’s not always relayed to us in a mean-spirited, vengeful fashion because the person got laid off or carries some kind of grudge against the company.

For example, we often interview people who had wonderful experiences at their former company, but will tell us matter-of-factly that they always copied their boss on emails containing financial information. This revelation can be a goldmine if those same bosses (now Defendants) claim they never participated in daily operations or saw the numbers.

Formers typically tell us that their bosses were highly involved in operations and when things were going well at the company, these bosses boasted about the success and prided themselves on being hands on. Unfortunately, when things start tanking as they did at Cendant, these same bosses all seem to sing the same song … “I trusted those who reported to me!” “I did not need look at the numbers!” “If there was a manipulation, it happened at a level below me!” “I was busy doing ____!”

It’s worth finding and interviewing former employees. In fairness, on occasion we interview formers who tell us about a Forbes-like creature out there in corporate America who is so out of it and clueless, it would be impossible for he or she to participate in fraud because this leader truly has had no idea what is happening at their own company.

I hope Forbes is telling the truth and wish him well. But, in matters like these it’s a valuable exercise to talk to those who were really in the trenches.

Labels: Cendant