No company’s perfect: Controls can have an unexpected weak spot and problems can slip through. But shouldn’t an electronic payment company practice what it preaches?

After an internal probe of its financial and accounting controls, Barry Zwarenstein resigned from his post as VeriFone’s executive VP and CFO. The audit found that VeriFone made incorrect manual journal and elimination entries for inventory-related issues.

We know what you’re asking: “Didn’t they have controls in place to stop that kind of abuse?” Well, yes and no. The scant, existing policies covering manual journal entries were blatantly disregarded (problem #1), and sufficient review processes and controls to spot those kinds of activities were not in place (problem #2).

The San Jose, California-based company said it best: Its team “did not maintain effective internal control over financial reporting.”

Not that you’d expect a major electronic payment company to be on top of its books, or anything.

The audit cost more than Zwarenstein’s job — VeriFone will have to restate its nine-month operating income by a whopping $37 million. Analyst Robert Dodd claims the restatement isn’t “a negligible amount by any means, but there were a fair amount of fears that it could have been a lot worse.”

There is a silver lining to VeriFone’s audit. The discovery of the weak internal controls has prompted the company to:

• Deploy a more sophisticated Enterprise Resource Planning (ERP) system to organize several data streams into a unified source,
• Beef up its accounting, finance, and compliance staffs, and
• Segregate financial planning and accounting/control functions to different employees.

With these “best practices” in place, CFOSnafu probably won’t be setting its sights on VeriFone again anytime soon.

Tags: Audit nightmares, Financial planning, Internal controls, Verifone