SEC Charges CFO with Diverting Company Dollars

On September 28, 2012, the Securities and Exchange Commission (SEC) charged the former chief financial officer (CFO) of a Minnetonka, Minnesota-based manufacturer of computer networking devices for secretly diverting company funds to cover unauthorized personal expenses and other employees' entertainment expenses that lacked any legitimate business purpose.

The SEC alleges that Subramanian Krishnan, the former CFO of Digi International, evaded the company's internal controls that he created in order to approve employees' falsified travel and entertainment expense reports over a five-year period. Krishnan also manipulated internal controls to review and approve his own expense reports that included unauthorized hotel and entertainment expenses. By doing so, Krishnan demonstrated a lack of management integrity.
 
Krishnan has agreed to settle the SEC's charges and consent to an officer-and-director bar and financial penalties that will be determined in court at a later date.
 
"Krishnan diverted company dollars for activities that were personal entertainment expenses," said Kenneth Israel, director of the SEC's Salt Lake regional office. "Krishnan basically reviewed and approved his own expense reports by thwarting self-designed internal accounting controls that are supposed to detect such misuse of corporate assets."
 
According to the SEC's complaint filed in US District Court for the District of Minnesota, Krishnan's scheme began as early as March 2005 and continued until May 2010, when he resigned. Digi's internal controls required the CFO's expense reports to be approved by the CEO. In order to circumvent this internal control, Krishnan arranged for the Hong Kong office to submit his expenses as belonging to other employees. This way, Krishnan had the final authorization to approve the expenses and reimburse the Hong Kong office directly, rather than needing CEO approval.
 
The SEC alleges that as the scheme went undetected, Krishnan submitted or approved large numbers of fraudulent expense reports for purported work and travel expenses. Krishnan knew the expenditures violated Digi's travel and entertainment policies because he personally drafted and approved these internal policies. Despite this knowledge that he was evading Digi's internal controls, Krishnan signed each of Digi's annual and quarterly reports over a five-year period and, as part of those filings, certified that Digi's internal controls were effective. He also signed twenty management representation letters to auditors that falsely asserted he had no knowledge of fraud involving management having a significant role in internal controls over financial reporting.
 
The SEC's complaint alleges that Krishnan, who lives in Plymouth, Minnesota, violated the antifraud, issuer reporting, internal controls, books and records, filing certification and lying to auditors provisions of the federal securities laws. Krishnan has consented to the entry of an injunction from future violations of those provisions, with disgorgement, prejudgment interest, financial penalties as well as the duration of the officer-and-director bar to be determined by stipulation of the parties or motion of the SEC at a later date.
 
 
Source: September 28, 2012, SEC Press Release
 

You may like these other stories...

Credit Suisse says pension assets at risk unless court delays sentencingJohn Letzing of the Wall Street Journal reported on Wednesday that Credit Suisse Group AG says its management of billions of dollars in assets for...
The prospect of International Financial Reporting Standards (IFRS) being fully adopted in the United States in the near future are growing less likely, as the Financial Accounting Standards Board (FASB) and the International...
House proposes $10.5B, eight-month highway billThe House Ways and Means Committee proposed a transportation funding bill on Tuesday that calls for a temporary extension of current transportation funding levels until May 31,...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.