A chartered accountant who joined the staff of Livent Inc. a year before a fraud was uncovered at the theatre company testified Monday he grew so suspicious about accounting irregularities that he asked his boss if Livent was "a fraud" - but was told to stop asking questions.
Chris Craib, a former senior controller who joined Livent in June, 1997, told a Toronto court he first noticed something irregular when he prepared an executive summary report for the company's second quarter of 1997, and was subsequently told to prepare a second version.
"The company's initial version was reporting a very significant loss - approximately $20-million - and in the later iteration, the expenses had been reduced and the company was showing a profit," he testified.
Mr. Craib said he approached his manager, former senior vice-president of finance Gordon Eckstein, to ask why the numbers had changed.
"He told me, 'Welcome to the real world,'" Mr. Craib recalled. "He was just very nonchalant."
Mr. Craib was testifying at the trial of Livent co-founders Garth Drabinsky and Myron Gottlieb, who are accused of fraud and forgery in connection with misstatements of Livent's financial statements between 1993 and 1998. Both men have pleaded not guilty and have suggested others at the company conducted the fraud without their knowledge.
In court Monday, Mr. Craib said the same pattern of changes occurred in the next three subsequent quarters he worked at Livent.
"The same event was continually occurring, whereby there was a set of financial results that were very bad, and then financial results that were much better," he said.
In late October, 1997, he said he and Mr. Eckstein took an executive summary of the third-quarter financial statements to Mr. Drabinsky's office, and set the report on his desk. He testified Mr. Drabinsky then asked Mr. Craib to leave.
"As I was leaving his office, he said to Gord, 'What does he know about this,'" Mr. Craib said.
"Mr. Eckstein responded, and I can only paraphrase, 'Do you think I'm the only person who knows down there?'"
Mr. Craib said the term "down there" referred to the finance department, which was on a lower floor of the building.
By early 1998, Mr. Craib said he could no longer deny to himself that Livent had major problems.
"Obviously I had significant concerns about what was occurring each quarter, and the arbitrary nature of what was occurring," he testified. "I was growing in my understanding that what was occurring was wrong, absolutely wrong."
By February, 1998, he said he decided to directly confront Mr. Eckstein, who was his manager.
"I said, 'Is this a fraud,'" he recalled. "He told me to 'shut the fuck up - you're not paid to think.'"
Mr. Craib testified he spoke to Livent's chief financial officer, Maria Messina, who also reported to Mr. Eckstein, and she confided in him that she had decided to get advice from her own personal lawyer.
"It appeared to me that something was going to happen, or something would address what was occurring," he said.
Ms. Messina then wrote a letter of complaint to Mr. Drabinsky and Mr. Gottlieb, which Mr. Craib said he felt was "a very pivotal event." The company then made adjustments to improve the accuracy of its first-quarter financial results for 1998.
Like Ms. Messina, Mr. Craib was also a former audit manager at Deloitte & Touche, and was in charge of auditing Livent's books before agreeing to leave the accounting firm and join the company.
Crown attorney Alex Hrybinsky asked Mr. Craib why he didn't disclose the fraud to accountants from KPMG, who came to Livent in the spring of 1998 to do due diligence for a group of U.S. investors who ultimately took control of Livent in June that year.
Mr. Craib said his primary focus wasn't on his responsibility to KPMG, noting there had already been a year-end audit by Deloitte & Touche, where he had also not disclosed the fraud.
"I came to understand that what was occurring at this company was completely arbitrary," he said.
"I had initially tried to block it out, or tried to view myself as not being a participant in what was occurring, or that I was not responsible for what was occurring - it was far above my head."
He said although he knew "something horrific" was happening, he had decided he would not be the whistleblower, leaving that task to Ms. Messina.
Also in court Monday, Mr. Hrybinsky took Mr. Craib through a series of executive summaries of financial statements that he prepared in 1997, which have been entered into evidence at the trial.
The summaries, which were given quarterly to Mr. Drabinsky and Mr. Gottlieb, each showed the company's real financial results for the period - which were large losses - as well as "adjusted" amounts showing big improvements.
The documents also included totals of the operating expenses that had been excluded from the financial statements to improve profits - a term Livent internally referred to as "roll forwards" - as well as the amount of asset amortization that was not expensed in the period as required.
At one point, Mr. Craib said he stopped using the term "carry forward" on his summary reports for the executives and instead started using "roll" to label the expenses that were not recorded and were being rolled to future periods.
He said he wanted everyone to clearly understand what was happening.
"I was concerned that the wording used in the second quarter [report]wasn't as exact to tell exactly what was happening here, so I changed it to be more reflective," he said.
Janet McFarland