The recent charges laid against the former CEO and CFO of Seattle’s CRM provider Entellium have caused some serious rumblings about financial accountability in venture-backed startups. The formers executives allegedly overinflated financial statements by 400% over several years, and no audits were performed on the company throughout that period. Obviously, it is not certain that a thorough audit would have uncovered the fraud, but it is likely that an auditor may have at least uncovered some discrepancies between stated profits and what could be gleaned from customer contracts, receipts and revenue recognition. It raises the question of why investors would bet on an unaudited pony in the first place, why there were no checks in place within the company, and why that was never made into an issue.
Entellium had raised over $50 million in capital, largely due to the impressive-yet-fraudulent profits posted to the board. The scheme began to quickly unravel on October 1, when both the CEO and the CFO quit after the VP of Human Resources discovered the forged books and turned them in to the board. Entellium is continuing to stay open in Seattle, with most of its operations occurring in Malaysia. Despite this seemingly-insurmountable setback, Entellium is hoping to find a CRM company to acquire at least part of its employee base and assets. In a humourously ineffective consolation, the executives did send an apologetic email to the board, admitting that “We have both made a grave mistake to misrepresenting our revenue reporting to the board. Looking back at the time we thought we would be able to right the wrong and correct or representation, but we have not been able to do this. Revenues have been overstated since 2004 … Clearly, this is devastating news and something we are both regret [sic] and are deeply sorry for.”
Here’s hoping that we don’t start to hear a rash of similar stories with the global economic downturn. What sort of economic checks should or could be put in place to ensure accountability in companies backed by venture funding?