AEA fires CFO, charges he embezzled

Electronic News, July 14, 1997 by Crista Hardie Souza

He got away with it, the AEA said, by following procedure to the letter. He got caught only after a former accounting clerk reported her suspicions.

William H. Phillips, Jr. was terminated from his position on March 11. The AEA filed suit on July 3, seeking to recoup total damages of $807,240.83 plus 10 percent interest, after Mr. Phillips allegedly reneged on a confidential agreement to repay the loss by June 30. The AEA later discovered Mr. Phillips used some of the money believed to be stolen to purchase rare gold and silver coins worth $18,805--which he had listed in the settlement agreement as personal assets.

Mr. Phillips' attorney, Stacy Shelton of Cochran, Shelton & Durket, did not return phone calls last week.

According to the suit, $250,000 was collected as a first installment, but the balance was not paid as agreed. A lien has been placed on Mr. Phillips' million-dollar mansion in nearby Milpitas--for which a sale is pending. According to the AEA, the real estate deal has been delayed by the buyer, who is awaiting city approval for structural changes to the property.

AEA chairman George Sollmon said the organization is working closely with the district attorney's office in Santa Clara County, which may file criminal charges, but he said the AEA's first priority is to recover its financial loss and get on with daily business.

"We've talked to a number of our member companies, and they seem to view the whole matter as the board taking steps toward restitution," Mr. Sollmon said.

After separate investigations by Coopers & Lybrand's forensic accounting unit and a third-party firm, which wasn't identified, the AEA is satisfied that Mr. Phillips acted alone and that there are no other "irregularities" independent of Mr. Phillips' alleged activities.

Investigations determined Mr. Phillips had generated and approved false invoices for consulting services by a fictitious Palo Alto, Calif., management information systems firm called the Solutions Group in amounts small enough to go undetected by auditors.

"There is no Solutions Group in the phone book," said Mr. Sollmon.

"In the future, all consulting services will require two managers to be involved and, there will be periodic reviews for consulting services that go on for more than a year--which is pretty unusual, anyway. I mean, here was this Solutions Group providing so-called consulting services for 12 years, and no one questioned it," he added.

Meanwhile, the AEA has made sweeping changes within its finance department, starting with hiring a new CFO, John Herrick. In addition, the single signature check approval limit has been lowered from $5,000 to $750.

Mr. Sollmon's own company, Centigram Communications, requires two signatures for checks of $2,000 or more. For a $140 million company, "that is not unmanageable," he said.

The extended episode will likely prompt other company leaders to review their own accounting procedures.

"Every story like this causes management to go back and look at what's happening in their own companies," Mr. Sollmon said.

As the CEO of a company that has had its financial records scrutinized by the public, Jeffrey Kalb of California Micro Devices (CMD) commented: "I think their priorities were correct in trying to preserve the assets of the corporation."

Mr. Kalb's company was put through the legal ringer for more than two years when it was discovered that a handful of company officers was "cooking the books" to affect CMD's stock performance. The company cooperated fully with authorities and the individuals involved have been indicted.

Mr. Kalb said CMD's finances go though a series of checks and balances to detect irregularities. "It's just my management style--independent of the securities litigation," which was finally settled earlier this year. Purchase orders and checks over a certain amount get double signatures, and management reviews all bills before they are paid, he said.

"Auditors typically recommend certain functions within the finance department be split as well, even in small companies," Mr. Kalb added. "People will pick up on these things more quickly when the numbers are widely distributed within the organization... In the case of the AEA, I have to question who was paying attention to finances besides finance."