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Where was the board during this whole time? I have trouble understanding how a board allows a management team to operate in such a way that controls aren't in p

by pge 6y ago

Where was the board during this whole time? I have trouble understanding how a board allows a management team to operate in such a way that controls aren't in place (eg basic segregation of duties in finance) that would prevent or at minimum reveal this kind of behavior. The board should be seeing enough information that most of the flags you highlight should be visible to them. Not to mention, clearly the company was never audited. Regular audits should be standard practice for any company of that size. In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities.

solumos 6y ago
> Regular audits should be standard practice for any company of that size. The company was audited twice, but the auditors tied the fraudulent bank statements to the fraudulent financial statements (woops). > In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities. Full cooperation with the SEC can get you a long way, especially if you're one of the victims of fraud.
- pge 6y ago
  Are you sure they were audited? I havent seen that in the material released so far, only that an auditor was engaged for due diligence, which was fairly cursory, not anywhere near an actual audit. Typically an audit would involve a direct verification of bank balances from the bank. In addition, an audit would typically directly verify customer contracts and make sure big deposits tied out to contracts and invoices. An audit would also have flagged the lack of segregation of duties as a major risk factor (though that should have been obvious to any board member). As a side note, I also wonder if Rogas was fastidious enough to ensure the GAAP financial statements all tied out with the fraudulent numbers. I guess if an audit couldn't catch this, you have the wrong auditor. This is exactly what audits are for.
  - deleted 6y ago
    [deleted]
  - solumos 6y ago
    You're correct, my understanding of "full audit" vs "due diligence" was off.
  - billyhoffman 6y ago
    Read the DOJ filing, linked in a comment below. The auditor physically sent a person on site whose job was to watch the financial people log into the banks web interface, verify the balance, and print bank statements for the last 12 months, all in front of the auditor. The passage doesn’t make it clear why the auditor didn’t watch the ceo pull the records for the accounts receivables account Update: filing Is here: https://www.justice.gov/usao-sdny/press-release/file/1317641/download https://www.justice.gov/usao-sdny/press-release/file/1317641... Relevant Passage: “As part of its due diligence process, the Audit Firm had an employee (the “Auditor”) conduct a physical site visit at NS8’s offices in Las Vegas, Nevada. The Auditor was directed by a more senior Audit Firm employee to have someone from NS8 log in to the online portal for each NS8 bank account, display the current account balance, and download monthly bank statements for fiscal year 2019.” “Based on my interview with a member of the NS8 finance department (“Finance Employee-1”), I have learned, among other things, that on or about March 11, 2020, Finance Employee-1 and ROGAS met with the Auditor in ROGAS’s office. The purpose of that meeting was for ROGAS and Finance Employee-1 each to log into the online portals for the bank accounts to which they had access (for ROGAS, the Revenue Bank Account) and download monthly account statements for the Auditor. During that meeting, Finance Employee- 1 logged into the online portal for the Expense Bank Account -- to which Finance Employee-1 had access -- and downloaded monthly account statements. Finance Employee-1 understood that ROGAS was doing the same for the Revenue Bank Account during the meeting”
lancewiggs 6y ago
Yes - this is the directors’ fault. As a director you have n obligation to ensure everything is ok, and for issues of this magnitude it’s clear that the directors were bamboozled. at our firm we insist on access to the financial system (e.g. Xero) whenever we have a directorship. It’s hard to fake results, at least to this level, when we can see down to the level of individual invoices.
throwaway2332 6y ago
I’ve been in board meetings with top tier, very well known VC board members where the CFO basically showed them the CEO was lying to them. The next two meetings the finance guy wasn’t allowed to present and then he quit. The board members never looked into it. It was like they didn’t want to know.

by pge 6y ago

solumos 6y ago

> Regular audits should be standard practice for any company of that size. The company was audited twice, but the auditors tied the fraudulent bank statements to the fraudulent financial statements (woops). > In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities. Full cooperation with the SEC can get you a long way, especially if you're one of the victims of fraud.

pge 6y ago
Are you sure they were audited? I havent seen that in the material released so far, only that an auditor was engaged for due diligence, which was fairly cursory, not anywhere near an actual audit. Typically an audit would involve a direct verification of bank balances from the bank. In addition, an audit would typically directly verify customer contracts and make sure big deposits tied out to contracts and invoices. An audit would also have flagged the lack of segregation of duties as a major risk factor (though that should have been obvious to any board member). As a side note, I also wonder if Rogas was fastidious enough to ensure the GAAP financial statements all tied out with the fraudulent numbers. I guess if an audit couldn't catch this, you have the wrong auditor. This is exactly what audits are for.
- deleted 6y ago
  [deleted]
- solumos 6y ago
  You're correct, my understanding of "full audit" vs "due diligence" was off.
- billyhoffman 6y ago
  Read the DOJ filing, linked in a comment below. The auditor physically sent a person on site whose job was to watch the financial people log into the banks web interface, verify the balance, and print bank statements for the last 12 months, all in front of the auditor. The passage doesn’t make it clear why the auditor didn’t watch the ceo pull the records for the accounts receivables account Update: filing Is here: https://www.justice.gov/usao-sdny/press-release/file/1317641/download https://www.justice.gov/usao-sdny/press-release/file/1317641... Relevant Passage: “As part of its due diligence process, the Audit Firm had an employee (the “Auditor”) conduct a physical site visit at NS8’s offices in Las Vegas, Nevada. The Auditor was directed by a more senior Audit Firm employee to have someone from NS8 log in to the online portal for each NS8 bank account, display the current account balance, and download monthly bank statements for fiscal year 2019.” “Based on my interview with a member of the NS8 finance department (“Finance Employee-1”), I have learned, among other things, that on or about March 11, 2020, Finance Employee-1 and ROGAS met with the Auditor in ROGAS’s office. The purpose of that meeting was for ROGAS and Finance Employee-1 each to log into the online portals for the bank accounts to which they had access (for ROGAS, the Revenue Bank Account) and download monthly account statements for the Auditor. During that meeting, Finance Employee- 1 logged into the online portal for the Expense Bank Account -- to which Finance Employee-1 had access -- and downloaded monthly account statements. Finance Employee-1 understood that ROGAS was doing the same for the Revenue Bank Account during the meeting”

lancewiggs 6y ago

Yes - this is the directors’ fault. As a director you have n obligation to ensure everything is ok, and for issues of this magnitude it’s clear that the directors were bamboozled. at our firm we insist on access to the financial system (e.g. Xero) whenever we have a directorship. It’s hard to fake results, at least to this level, when we can see down to the level of individual invoices.

throwaway2332 6y ago

I’ve been in board meetings with top tier, very well known VC board members where the CFO basically showed them the CEO was lying to them. The next two meetings the finance guy wasn’t allowed to present and then he quit. The board members never looked into it. It was like they didn’t want to know.