Cardinal Refuses to Reinstate CFO

In the first Sarbox whistleblower case to go to trial, Cardinal Bankshares blocks CFO from reinstatement until a final order comes through.

Moore pointed out that in 2003, the Securities and Exchange Commission asked for documents related to the Welch’s claims that year and have never come back to the bank with any comments. Bank regulators, including the Virginia State Corporation Commission and the Federal Deposit Insurance Corporation, have also given Cardinal a clean bill of health three times since Welch made his allegations, the CEO noted.

For his part, Welch testified that he refused to certify Cardinal’s third quarter 2002 financial statements because of improper journal entries amounting to $195,000. As a result of the improper accounting, Cardinal showed a decrease in taxable income for 2001, a decrease in expense in 2002, and an increase in net income for 2002, according to Welch’s testimony.

Welch also testified that the 2001 entries were material and should be restated because “the third quarter’s income statements and balance sheets [for 2001] would appear in the following year in the third quarter of 2002 as comparative statements,” which are relied upon by investors. The error convinced Welch, according to his testimony, that the overstated income made Cardinal appear to performing better than it really was.

In addition, he noted that the incorrect journal entries were made by the bank’s internal auditor. That was problematic, the ex-CFO asserted, because “the internal auditor should not be making journal entries to the general ledger when she’s going to be responsible for possibly auditing those same numbers.”

Moore said that when the accounting discrepancies were brought to his attention, he turned the investigation over to the audit committee, which hired its own investigator. “I did not participate [in the internal investigation] at all,” said Moore.

In September 2002, the audit committee hired Cardinal’s auditor, Larrowe and Company, to help with the internal investigation. The accountant at the firm that audited Cardinal’s financial statements was not involved with the probe.

Welch, a certified public accountant who also holds an MBA, has not held a permanent job since being fired from Cardinal. Currently Welch prepares online accounting courses for Liberty University. Before joining Cardinal as CFO, he served as a staff accountant at Larrowe and Company; a controller for Wellmont Health Systems; a cost accountant and financial analyst for Quebecor Printing; and an adjunct professor at both Tusculum College and Northeast State Community College.

Asked why he thinks Welch has not been able to find permanent work since being fired, Shine said that he believes the marketplace perceives the former finance executive as “damaged goods.”

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