Re-examining Financial Controls p.

By: Larry Timbs and Ron Chepesiuk

The Charlotte Observer is re-evaluating its internal financial
procedures in the wake of an alleged $2 million embezzlement sp.

An alleged $2 million embezzlement at the Charlotte Observer ? described by the FBI as one of the largest in North Carolina history ? has sparked a painstaking re-examination of all internal financial controls at the 232,000-circulation newspaper.
Rolfe Neill, publisher and chairman of the Charlotte Observer, one of 28 newspapers owned by Knight-Ridder Inc., of Miami, Fla., said that one consequence of the suspected embezzlement has been a renewed emphasis at the newspaper on basic accounting principles.
"Basics. It's always back to basics," Neill said of the alleged embezzlement of Observer funds by a former Observer production supervisor, two other men, and a contract printing company. "We were in violation of some fundamental accounting principles."
Neill acknowledges that the newspaper stands only a slim chance of recovering the $2 million and the thousands of dollars it has spent in connection with the case, but says important lessons have been learned.
"We looked at what we had to do and did it," Neill said. "It's very plain. Be sure you're covering all basics of accounting and inventory control. Those areas [at the Observer] have been strengthened, shall we say."
Asked if the strengthened accounting and inventory controls at the paper now make the Observer immune to embezzlements, Neill said nothing is certain: "The people who have the most money in the world ? banks ? are defrauded all the time, even though they supposedly have the best controls in the world, but one thing you do know is, if you follow the fundamentals, you are less likely to be vulnerable."
The suspected embezzlement of newspaper money, according to a lawsuit filed by the Observer, involves former Observer platemaking supervisor Oren "Pat" Johnson, a 22-year employee of the company.
The Observer says that Johnson, fired by the newspaper in June 1992, was part of a false-billing conspiracy that had lasted seven years and stole $2 million from the paper. Also named in the lawsuit as defendants were two Charlotte businesses, Graphic Image Inc. and Graphic Color Prep.
According to the Observer's lawsuit, Johnson was part of a scheme in which over a period of several years the newspaper paid Graphic Image for supplies the Observer had not received. The suit alleges that Johnson and the other defendants defrauded the Observer.
Three Observer executives with administrative and accounting responsibility resigned following the alleged embezzlement.
Described by publisher Neill in a July 24, 1992, Observer story, as "good people . . . who contributed a lot to the company," the three executives are not implicated in the suspected theft.
The case has resulted in criminal charges against Johnson and the part-owners of Graphic Image Inc., John Rawlins and Doug Moore. The three men were each charged in a December 1992 Charlotte grand jury indictment with mail fraud, money laundering and conspiracy.
Graphic Image Inc. and Graphic Color Prep are also charged with conspiracy in the indictment. If convicted, each of the indicted men faces possible maximum sentences of hundreds of years in jail and million-dollar fines.

Publisher's pledge

Neill also said that, while it has been devastating for a person "to have been systematically looting this place . . . and there's a sense by other employees of betrayal," the suspected embezzlement otherwise has had little effect on ongoing operations of the newspaper. He said the paper will continue to keep the public informed of the case through news stories.
"It's the largest known embezzlement in North Carolina, so it's a big story," Neill observed. "It involves us. We are the story. We have to be conscious of that."
He said the newspaper will provide news coverage of the case just as it would any similar story. He noted that Joseph Menn, Observer business writer, has been assigned to the story and has already written several published articles on the case.
"He asks us questions just as he would any third party," said Neill. "He's getting no inside direction from us. We are covering it with the same sort of correctness as any other story."
Menn, an Observer reporter for four years, says that in some ways the story of the alleged embezzlement has been very sensitive and awkward to cover. However, he also says he has had full cooperation of the newspaper's management in pursuing the story.
"Rolfe Neill told me to treat it like any other story," Menn remarked. "On any given major story, there are going to be enough people involved, in my experience, that most reporters don't have 100% rave reviews of the process, but this [covering the alleged embezzlement at the Observer] gets as close up there as any I've had in my experience," Menn said. "It's been 100% in terms of freedom. The freedom issue is an A-plus, but I won't say working on this story hasn't been awkward."
Menn asserted that he will continue to stay on top of the story. "I think the majority of the work is over with but I imagine we'll be covering the trial if it goes that far."

Scandal takes toll

Another Observer reporter, speaking on condition of anonymity, said the Charlotte Observer definitely has been hurt by the suspected embezzlement. "It [the alleged embezzlement] is the most horrible scandal in Knight Ridder history, but Knight-Ridder will survive. They'll fire some people and swallow this."
Already, the reporter said, three high-level people have been fired at the newspaper who had nothing to do with the scandal. The reporter noted that publisher Neill said recently in an internal publication to Observer employees that, on a scale of zero to 10, the suspected theft of millions of dollars from the newspaper rates a 13.
Why it took the newspaper so long to discover it was missing millions of dollars, the reporter said, was because, "When you're making money, nobody asks questions."

Competitors react

How good a job has the Charlotte Observer done covering the story of how the newspaper lost $2 million?
Opinion among editors of area magazines and newspapers, which compete against the Observer for readership and advertising, is mixed about the Observer's self-coverage
John Grooms, editor of Creative Loafing, a 50,000-circulation alternative weekly magazine in Charlotte, says the Observer could be telling the public a great deal more.
"Rather than taking an in-depth look at a snafu that should not have occurred, they have just given us the least information possible, in an effort to give the appearance of satisfying the public's need to know without going into too much detail," Grooms said.
He added that the Observer's coverage of itself in the suspected employee theft of such a sizable sum of money has been, at best, superficial.
"It's the usual self-serving public-spirited PR that we get from that group. They haven't gone into the kind of depth that can explain how such a stupid thing could go on . . . . "
Grooms credits Creative Loafing for helping to spark the Knight- Ridder newspaper to share its embarrassing situation with the public.
"I'm sure there are people at the Observer who didn't want to have this story published, but they had to because they knew there were local publications like Creative Loafing that would have written something about the story," Grooms contended.
Terry Plumb, editor of The (Rock Hill, S.C.) Herald, a 29,000-circulation daily that competes with a zoned edition of the Charlotte Observer in York County, S.C., thinks the Charlotte newspaper has generally done a commendable job of self-coverage of the scandal.
"What I know about it [the suspected embezzlement], I've picked up from reading the Observer," Plumb said. "I don't know what else you could ask of them . . . . In terms of covering it, I think they were very up-front in airing their dirty laundry, so to speak. I'm certainly not going to criticize them. I empathize with those people."
The Herald and the York Observer, a zoned edition of the Charlotte Observer, compete vigorously for advertising and readership in a market often described as engaged in a newspaper war in South Carolina.
Plumb, however, said he is not pleased with what has happened to the huge Knight-Ridder-owned paper just 25 miles north of him. "I don't take any satisfaction or joy in what happened to them. I think it's a terrible thing to believe they may have been betrayed from within, and it must be tough for them to get over it."
Plumb added, "When you're in the news business and you have to tell the world, it's doubly painful."