Few Chicagoans have heard of Gary Seidelman. He’s 52. Lives in Batavia. He’s spent three decades as an accountant. Other accountants should get to know him, however, because the story of Gary Seidelman is a cautionary tale with lessons for anyone handling the books of public companies.
Seidelman is the PriceWaterhouseCoopers partner who headed the audits of Anicom, the notorious wire-and-cable company in Rosemont that turned into a baby version of Enron Corp.
Anicom collapsed in an accounting scandal that cost investors tens of millions of dollars. Five of its executives, including its former CEO, have pleaded guilty to criminal charges. They are expected to testify in a trial slated for next year against the former chairman, Scott Anixter, and ex-chief financial officer, Donald Welchko, who have pleaded not guilty in the case.
Seidelman was never charged with a crime. In fact, court records indicate Seidelman was lied to–over and over. As Anicom started its downward spiral, Seidelman asked questions an auditor should ask. But when he didn’t get plausible answers, the SEC found, he failed to fulfill his responsibility to protect the public trust.
For auditors, this is the key lesson from the wave of corporate scandals over the last few years. It’s not acceptable to close the eyes and bend the rules. When a client pushes for a break, auditors must push back. Otherwise, investors pay the price–and auditors, too.
In a terse, 12-page order issued Aug. 11, the SEC spells out Seidelman’s mistakes precisely. It’s reassuring to see how the regulators have taken the trouble to dissect this complicated case. It’s surely a measure of how far the financial world has come since the Enron wakeup call.
Between 1998 and 2000, as Anicom’s business was going to pot, its executives invented some 66 fictitious sales transactions to make things look better on paper, the SEC found. In 1999, they manipulated a big restructuring charge in an effort to cover up the problems, the order says.
Seidelman is faulted for being too willing to accept the word of Anicom’s brass, failing to design audit procedures to detect the fraud, and providing his seal of approval even when the necessary records were not produced.
Among other mistakes, he allowed the company to conceal from him the details of an internal investigation done in response to whistle-blower allegations. The SEC says he should have forced the company to waive its attorney-client privilege and provide him with that report. And if the client refused? Resign the account, apparently.
As this ruling shows, the SEC wants such hardball tactics to become the norm. Auditors who know what’s good for them should be ditching their clients who raise the red flags of fraud.
Without admitting any wrongdoing, Seidelman agreed to be suspended from practicing before the SEC for at least three years. The effect is that he can’t audit public companies unless the suspension is lifted. That’s a reasonable, measured sanction, especially since his firm already has paid more than $20 million to settle civil litigation with Anicom shareholders and others.
The regulators are sending the right message. Let’s hope other auditors hear it.
