Auditors and the SEC Cannot Protect Investors from Fraud

There are many fools investors who believe that the SEC and auditors will actively prevent companies from engaging in financial statement fraud. These people are wrong, as shown by the SEC’s lawsuit against GlobeTel (OTC BB: GTEM), which at various points in time while the alleged fraud was taking place traded on the Pink Sheets, OTC Bulletin Board, and AMEX. Yet despite having audited financial statements, its auditors did not find the underlying alleged fraud. The SEC’s complaint (pdf) alleges

violations that span more than five years and include fraud and the unregistered sale of more than $l .6 million in stock. These violations involved one scheme to fraudulently inflate GlobeTel’s revenue and then hide millions of dollars in unpaid bills,and another scheme to sell GlobeTel stock in order to pay some of the
individuals who were responsible for the fraudulent inflation of GlobeTel’s revenue.

If you invest in a company, make sure you can trust management. While there are clues that a company may be cooking its books, dishonest management can fool even sophisticated investors for a long time (as Enron famously did).

Disclosure: I have no position in GTEM. I have a disclosure policy.

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