When The Gatekeeper Lies

It has always been my contention that the one of the keys to good investment decisions is to pick companies with good management. But, knowing good management isn't always easy as pointed out by this article from Reuters - Witness in WorldCom Trial Admits to Lies. Ex-CEO of Worldcom, Bernard Ebbers is currently on trial in New York for his part in the financial collapse of his former company. Mr. Ebbers is a former poster child of the great managers of the 1990's that led us to the stock market crash of 2000, 2001..... The CFO of Worldcom, Scott Sullivan, was also a darling of the financial press during this time. For the better part of last week, Mr. Sullivan who has already plead guilty to financial fraud, has been testifying against Mr. Ebbers. As the article chronicles, Mr Sullivan came under cross examination yesterday. Judging by this and other articles Mr. Sullivan lies. He loves to lie. And, there is no one he evidently won't lie to. He lied to the Board, shareholders, analysts, the press, the government and who knows who else. This brings us to the question we need to ask our selves as investors. If Mr. Sullivan were committing his crimes today, what law, or control system, regulation or agency would stop him. How much money and diligence would it take? If I gave you the books of Worldcom with its millions of entries, would you be able to pick out the few fraudulent entries? Remember this, their outside auditing firm didn't. And finally, remember that Mr. Sullivan would be the gatekeeper over all this sophisticated, expensive new internal control.