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Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books by Joseph T. Wells

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Chapter 17

Power and Corruption in the Publishing Industry

Kenneth Biddick

High-magnitude financial statement fraud rarely happens at the hand of only one individual. Sometimes though, the influence of a leader is so powerful that it defines the culture of the organization and can cause employees to commit fraudulent acts they would otherwise never consider. In such instances, the employee's behavior can extend far beyond his or her intentions—or so the accused will claim.

To be fair, there were many bad actors in this case who significantly contributed to the complex financial gamesmanship about to be discussed. In fact a judge hearing one of the many actions brought against the company identified the “Inner Circle” as a criminal organization. And not unlike in a criminal organization, the “boss” was generally removed from direct involvement. However, the actions of the perpetrators had to be approved or ordered, with knowledge somewhere in the chain of command.

If you define powerful as the ability to control and have undue influence, then Sam McFarland was the most powerful man in the largest publishing company in the past five decades. One of McFarland's key means of control was having the final say over salaries and bonuses, including controlling awards of deferred compensation funded in company stock. Employees were held captive by the practice of being denied their accumulated company stock if they left for any reason other than retirement.

A veteran and a law school graduate, ...

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