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Tuesday, May 03, 2005

What Does Your CEO Really Know?

How much does any CEO know about his company's finances? How much should he know?

Those are the central questions in the trials of several chief executives accused of masterminding their companies' massive accounting scandals. These CEOs claim they knew nothing of the financial machinations that rocked their companies. In each case, they insist, a manipulative and conniving CFO acted alone.

But the amiable-dunce defense has failed spectacularly at least once. This past March, former WorldCom CEO Bernard J. Ebbers was found guilty of conspiracy, false regulatory filings, and securities fraud in connection with the 2002 demise of the telecom giant—convicted despite his insistence that former CFO Scott Sullivan unilaterally cooked the books. (Sullivan, the prosecution's star witness, admitted to the cooking, but testified that his former boss held the frying pan, a scenario the jury found more plausible than Ebbers's version.) Similarly, Richard Scrushy, former CEO of HealthSouth, maintains in his ongoing trial that conspiring executives, including five former CFOs, committed the $2.7 billion fraud there. And Kenneth Lay, former Enron chairman and CEO, is widely expected to employ the ignorance defense when his first case gets under way, perhaps as early as next month.

So what gives? All these top executives insist they didn't possess the knowledge necessary to execute the frauds in question.

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