Just because you run a private company that does not have to file quarterly financial statements with the SEC does not make it okay to cook your books. The CEO and CFO of Seattle-based CRM firm Entellium found that out the hard way. They were arrested by the FBI earlier this week for inflating their revenues and then lying to their board about it. The company appears to be toast. It fired two thirds of its staff of 60 people in Seattle, and its Website is down. We are putting it in the deadpool.
The CEO, Paul Johnston, and CFO, Parrish Jones, kept two separate set of books. One they showed the board, and the other was the real one. The fake one inflated revenues by $11.7 million over the past three years. For instance, in 2006 they told the board that revenues were $3,950,362, but they were really only $582,079. In 2007, the fake revenue number jumped to $6,291,705, whereas the actual revenues were only $1,446,238. This deception continued until September 26, 2008 when the VP of human resources, Melisah Wojtacha, came across the fake board books while cleaning out the desk of a former sales VP.
The scandal in Seattle is particularly embarrassing for Ignition Partners, the VC fund made up of former Microsoft hotshots who put in $19.7 million of the total $50 million that Entellium had raised. Ignition’s Jonathan Roberts sat on Entellium’s board (as did former Cisco CIO Pete Solvik, now a managing director at Sigma Partners). Did they not have outside auditors verify the accounting?
Ignition can kiss that $20 million goodbye.
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Right here in my backyard across the water. How could they get away with it for that long. Where were the VC’s auditors.
Cooking books is ALWAYS stupid, you don’t only cheat investors but you cheat yourself in the long run. I don’t understand the mentality behind this especially considering they would have to pay even HIGHER taxes with HIGHER revenues (I am assuming these are profits). A huge headache that was easily avoidable with proper auditing and people doing their job… more than a few people where sleeping at the wheel of this company.
Jon
http://WoodMarvels.com - Create Unique Memories
These so called make me sick.
http://www.zenbylunch.com
hush. have a sha chi sandwhich.
If two small time startup execs are hauled off by the Feds for fraudulent reporting to their board and investors, then by rights, there should be mass arrests at most of America’s banks and hedge funds (and AIG) for what is real, genuine, scandal.
Why is DIck Fuld not in Jail?
Because he didn’t cook the books (as far as we know)
It’s true.
America’s banks and hedge funds (and AIG) should be held greater accountability and responsibility compared to these two.
Though the banks didn’t cook the books but the tricky procedures/practices that they used “legally” has lead to a greater trouble to the whole nation and the whole world. In comparison, the banks are in a greater wrong and owe much more than just apologies.
But why Johnston & Co. got nailed instead? Because they are a nobody compared to institutions like banks and giants like AIG. Then again, they probably should be held accountable for fraud nonetheless.
The question remains the same, why are America’s banks and hedge funds (and AIG) are free to go and even bailed with tax payer’s money. To help the general public maybe but who’s going to jail?
wow, way to run a business …. fire their accountant !
These two criminals should be executed.
He who is without sin cast the first stone. -JC
ignition is at fault here….the involved partner should immediately be fired.
Paul Johnston is not from Malaysia.
Apparently, the CEO/Founder Paul Johnston of Entellium is based in Seattle and was born in Northern Ireland.
The only reason he was affiliated to Malaysia and other places in South East Asia in 2000 was because he was taking advantage of low-cost labor in Malaysia and Asian countries to undercut the prices of competing products from Salesforce.com, NetSuite and other companies that specialize in software to manage sales leads, customer service and marketing programs.
But their primary presence and business presently for more than 5 years has always been in ***Seattle, United States. If there should be a place of origin, then it will be his birth place in ****Ireland.
You can find full/complete details here from an old article -
http://seattlepi.nwsource.com/....._vc17.html
Yeah great strategy
Every company that tries to compete with Salesforce gets crushed, or hadn’t people noticed yet?
…& that my friends is why you need audited financial statements AND bank statements. people always forget the second part. that’s the same reason we are in this sub-prime mess.
Hmm, you must think that auditors don’t reconcile cash and equivalents against bank statements. There’s many reasons we are in this “sub-prime mess”, but I don’t think that’s one of them.
you are right, walking into a mortgage brokers office 2-3 years ago and being able to secure a 90% $1M cash out loan with nothing more than what I stated was my income, and how much I stated in my bank account had nothing to do with it.
Right, because we all know now that banks were forced to offer those loan products.
I take my hat off to Melisah Wojtacha. I can’t even imagine the mental stress hanging over her.
I have not read the filing (will tonight). The only thing that comes to mind on how they kept this going so long was that they may have convinced “some” people that they were recognizing revenue by contract value. SaaS revenue recognition can be blurry. Again, have not read the filings. For Auditors, Lawyers, VC’s etc to be so out of the loop is disturbing….. AND with MULTIPLE rounds of financing.
I believe I read somewhere that the “cooked books” were found in the recently departed Head of Sales desk while HR was cleaning out.
This situation has been taking twist after twist and none in a positive direction. I have been following it closely. It started with a massive layoff then an arrest by the FBI. After this I noticed a CRM vendor, Salesboom.com, offically issue a release offering free data migration from Entellium and job opps for ex Entellium staff. Now the site is down, so if i’m not mistaken there are now a lot of unfortunate Entellium customers with no access to their CRM!
Really how did this happen? It must have involved so many people at the company.
Auditors aside, what about bank statements? Cash is king … if they didn’t make this much, they must have at least “lost” less than expected too (revenue shortfall)?
In all my start-ups, the first slide of financials is always the bank statement, from the bank. The books are secondary at best until you are at scale …
While this is pretty interesting - in Minneapolis we have a movie in the making going on. A local super-star entrepreneur is accused of ripping off hedge funds and other investors of $3B + over 15 years…it has to be one of the longest and largest ponzi schemes ever.
http://tinyurl.com/5xdofc
@Jason - great point about revealing bank statements to the board.
The VCs were not smart here. In a few of my client companies, the lead VC places a trusted controller or interim CFO inside to account for all of the cash, manage the books and provide an extra pair of “eyes” (read: integrity) in conducting the business.
The CEO should have realized that this was going to catch up with him at some point. Lies beget lies. He doomed the company 3 years ago when he started the shell game…and he’s getting what he deserves.
erick - real numbers still show good growth. tc should buy them….or the govt will
I’ll buy all your customers.
Make us an offer.
http://www.FreeCRM.com
sales@freecrm.com
Steve Jobs backdated stock options. He did that at Apple and Pixar and nothing happen to him. The level of corporate integrity has gone awash.
Kudos to the VP of Human Resources (Melisah Wojtacha) for doing the right thing.
The website’s not down, it’s fine. Their product appears to be running fine - it looks like the rumors of their demise may be slightly exaggerated.
I don’t care who is at fault, all I know is I will be due a lenghthy background check on each board member, because the ones on that board fell asleep on duty and I sure as heck will not want to risk my life savings with those chumps.
Another reason why it is bad to have executives with to many projects and be on boards at the same time.
Second that.
Kudos to the VP of Human Resources (Melisah Wojtacha) for doing the right thing.
This is the type of person I would want to hire at my company.
Have VC firms learned nothing from Enron, RiteAid, Worldcom??? We absolutely need something like SOX-lite for private companies.
As a finance director and controller for a prominent startup, I deliver both good news and bad to executive management and the board. My job is to give sober historical and forward looking results. I hope Paul and Parrish go away for a long time and take anyone else who helped prepare those fraudulent board reports with them. There is more to this story…for sure.
Yes. It has to go deeper or broader than just those two.
I think in the Web 2.0 world, these kind of actions are likely to be more common, basically because VCs only invest single-digit millions in most companies. These investments represent a small part of their funds, and thus they are not so motivated to closely follow the accounting at the companies. This lack of monitoring can cause a CEO to see a big pile of cash sitting in a bank account, and nobody looking after it. I know of startups without a CFO or VC-mandated controller on board, which makes it -very- easy to cook books. When the investors care to look, it’s already too late.
Congratulations to Melisah, I know what she must have been going through. As a general note, do the right thing - if you see something “funny” in your startup, do your best to make sure it really is something that needs reporting (the risk is looking like an ass, and losing everyone’s confidence in you), and then report it to the board/investors.
Ignition is run by a cohort of ultra rich Microsofties. To them the difference between 4M and 14M is rounding error in the value of their jets.
Now ask why they were not paying attention. Doh!!!
Entellium made my company’s short list of potential CRM vendors. We ended up with Sage, and thank the lord we did.
In my book, management fraud is pervasive. We read about it all time in the papers. It has been so bad in two companies I worked in during the last 15 years that the government intervened to end it in both. Generally, employees look the other way where it happens because it is a very lonely walk to stand up to it. You may lose your job and find that you are unemployable. It happened to me once and I spent the next four years looking for work. In that case, I went to the Board of Directors blowing the whistle and they were as crooked and incompetent as their managers. What about outside CPA auditors? I think they are part of the problem. I find them to be more concerned about their fees than seeing to it that the accounting is accurate. Look at the current economy scandal. They say the biggest problem is banks won’t lend to each other because they do not trust each other to be solvent. Do you really think these banks have been issuing accurate financial statements? Of course not. They have been doing their best to hide their deteriorating financial conditions. Where have all their CPA auditors been? They have been collecting their big fees while they looked the other way and wiped their finger prints. Remember the massive shredding of documents that the discredited Andersen CPA firm carried out as Enron imploded? They were convicted of obstruction of justice on that one, although a court over turned the conviction on appeal due to a technicality over a jury instruction. In this case, it looks like a courageous employee did the right thing and came forward. In most cases, it does work out well for such an employee.
Correction: In most cases, it does work not out well for such an employee.
May I’ll get it right this time. Correction: In most cases, it does not work out well for such an employee.
Check globalscholar.com they are another Ignition backed company. Globalscholar.com is a hotbed of unethical activity. Globalscholar.com is a cheating service for college students they do homework, tests, quizzes, papers and everything else at a price. Globalscholar.com has also been firing people 1 2 and 3 at a time for past months to get out all the people who are not Indian like their CEO. Globalscholar.com is a bad bad bad company to work for with lots of problems. Stay away.
I have to agree with this. I was lied to and fired a few months ago. I’m not bitter anymore. I’m glad I was fired when I was because (1) I hated my job and (2) the job market has dried up alot since then and it would be a harder to find another job now.
Anyway, what the last commenter wrote is right.
They totally enable cheating. Just go to the globalscholar.com and start a live chat session with a customer server rep. Pretend you have some homework questions or an essay that needs to be done quickly, and ask how the service works. I tried this recently and the customer service rep basically said he’d could have someone do my math problems for me. It was a customer service rep. in India that told me that. I don’t know if it’s something that occurs with reps from the India office or just a few people there, but I don’t know any of the customer service reps in the Bellevue office that would even suggest that.
Kal knows that cheating is happening and he refuses to let anyone talk or email each other about it.
The management there is basically incompetant. I don’t really fault some of them because they’ve been often promoted from a position they’re qualified and competant at into a position and/or discipline that they’re not.
Good people get fired and other employees don’t know about it. There were people who were fired when I was there, and I hear of it for weeks. At other companies I’ve worked at, there is usually some communication about it to the team. I just talked to a guy who still works there but on a different team. He wondered why he hadn’t seem me around recently, and wondered if I had quit. He really had no idea that I had been fired. The reason that it’s not talked about is because people would wonder why valuable assets to the company had been fired.