The news that a former PR executive has been arrested and charged with defrauding his last two firms in excess of $2 million should serve as an alert for PR agency owners who want to get a better grip on their internal control & expense reimbursement practices and avoid becoming victims of employees who cross the line.
The U.S. attorney for the Southern District of New York charged the accused with wire fraud in connection with multimillion-dollar schemes to defraud the two PR firms where he worked, per O’Dwyer’s.
According to O’Dwyer the suit, which was announced in early October, does not identify the PR firms that employed the accused, but the allegations cover the period from 2013 to 2018 when he worked as an executive VP. I am intentionally withholding the name of the accused and the two firms since my intention is not to further the pain the two firms suffered but to prevent this from recurring in the future. I will note that the firms are terrific firms with very strong C-Suite leadership.
The executive is charged with two counts of wire fraud, each of which carries a maximum sentence of 20 years in prison.
TO BE CLEAR, THE VAST MAJORITY OF PR AGENCY EXECUTIVES AT ALL LEVELS ARE HONEST, HARDWORKING PEOPLE WHO STRIVE TO BE TRANSPARENT IN THEIR BUSINESS ENDEAVORS.
At the same time, few PR firms have safeguards in place to protect the agency from bad actors and fraudulent behavior.
Owners of boutique and much smaller PR firms, of course, must pay careful attention to their internal controls and expense reimbursement policies.
However, once PR firms exceed $10 million or so in net revenue, CFOs and other senior executives need to manage the top and bottom lines and don’t necessarily have the bandwidth to watch every last expense. There needs to be controls implemented to do that for them. For example, controls must be set up to ensure separation of duties and checks and balances for incoming payments from clients (deposits, credit card payment, wire transfers), ongoing payments for expense reimbursement to staff and payments to vendors and especially signing authority for checks and reconciling bank accounts. There must be an approval process to assure checks and balances.
Large public companies have internal auditors as their watchdog. Other large firms will have their CPA firm do annual internal controls reviews. Smaller firms may have their COO responsible for internal controls. No matter who assumes this role, a financial watchdog, in my opinion, is needed.
With that in mind, there are three benefits for hiring a financial watchdog for your PR agency.:
- Reevaluate the expense reimbursement system. Job one for the financial watchdog is to conduct a thorough review of the agency’s internal controls and look for the weak spots. The review would encompass a thorough review of the necessary internal controls; who is approving the transaction; who is signing the checks; who is making deposits; reimbursement requests and vendor transactions. This sounds fairly basic. But many firms leave a vacuum where they should be paying attention and make themselves vulnerable to fraud. And when there is a theft — bogus flight and hotel bills charged to the firm or a “dummy” vendor set up to line somebody’s pocket — it’s bound to have a ripple effect. Repercussions include potential layoffs to make up for any financial losses, reputational damage and eliminating certain perks that will upset deserving employees. A breach of any kind of magnitude may also spur a sale of the PR firm sooner than an owner may have wanted because the value of the firm could start to erode. A firm that Gould+Partners sold was a result of a CFO absconding hundreds of thousands of dollars over a three-year period. There have been many other examples of misappropriation of funds over long periods of time.
- Bolster the firm’s overall business acumen. Because the financial watchdog is tasked with inoculating the firm against financial wrongdoing, it’s key that PR owners go outside the PR field to fill the position. It’s another opportunity for PR firms to professionalize their financial management. The watchdog should have solid financial credentials. Working closely with the C-suite, the watchdog can sharpen internal financial controls/due diligence; develop more transparency for expenses and reimbursement and create stronger checks and balances throughout the firm.
- Brace the agency for the future. Whether it’s cybersecurity or more traditional types of security, PR firm owners face growing challenges when it comes to protecting their assets. Hiring a financial watchdog is an operational expense, of course, but it’s also a sound investment. It’s a way for PR firm owners to lose the “It Can’t Happen Here” mindset some owners suffer from and better prepare for the various threats they face, be they known or Known unknowns. Investing in a financial watchdog also shows clients and prospects that security is top of mind, not to be underestimated in what is an increasingly complicated business world. C-level executives and their top deputies need to focus on the day-to-day operation, pleasing clients and biz development. The expanding bandwidth needed to protect PR firms from financial fraud in whatever form it takes requires a dedicated hand.
Rick Gould is managing partner of Gould+Partners.