When it was originally founded in 2003, Theranos was dubbed as one of the most significant health technology companies to come along in a generation.
Founded by Elizabeth Holmes, the business manufactured blood tests that were - at the time -considered to be wildly innovative. They required very small amounts of blood to operate and produced results incredibly quickly, thanks in large part to additional automation techniques that the company had spearheaded. Not only was Theranos able to raise more than $700 from various investors, but it also enjoyed a $10 billion valuation as well - all of this culminating in a wildly successful 10-year run.
If Theranos sounds familiar, it's likely because of the trail of fraud that followed in its wake. The tests that the company produced absolutely did not function as claimed. The company's founder, the aforementioned Holmes, was indicted on multiple counts of wire fraud, among other charges. In February of 2021, Holmes (along with other executives) was accused of destroying evidence. In early January of 2022, she was found guilty on three counts.
So what led to this point and how did it occur in the first place? The answer may be a lot more straightforward than most assume:
A lack of company controls may be to blame.
Why Company Controls Are Critically ImportantAlthough nobody can underestimate the malice of others, one of the major reasons behind Theranos' significant rise and dramatic downfall may ultimately come down to the fact that it did not have a CFO during the previously referenced period.
Also called a Chief Financial Officer, a CFO is essentially the highest financial position within a company. They're not only responsible for maintaining current financial and operational data (and reporting on that information to other key decision-makers), but they provide forecasting about future earnings potential as well. They're also tasked with advising any applicable Board of Directors and/or CEO about the best strategic direction to take...
... which is likely when "don't sell a product that literally does not work as promised" likely would have entered into the conversation.
To be clear, this isn't to say that Theranos operated without a CFO for the entirety of its existence. It's just that a single person filled this position over 15 years - a man named Henry Mosley, who was fired after just eight months. He was unceremoniously removed, in part, because he raised concerns that the company was faking test results.
As it turns out, the rest of the organizational decision-makers likely should have listened to him.
But if nothing else, this just serves to underline the importance of strong company controls - a series of checks and balances where people in positions of power are able to not just offer their opinions but to also step in should something be heading in an unethical (or in this case, illegal) direction.
This approach to running a business extends far beyond the Chief Financial Officer, too. A mechanism for internal controls helps leaders better understand the risks that they face so that they can mitigate them whenever possible. You can't make the most informed decision if you don't understand A) what the risk actually is, and B) what the consequences are.
For a CFO, these types of internal controls also help to get a handle on various financial statement assertions. This involves claims over not only rights but also completeness and accuracy as well.
But most importantly for this example, internal controls also help to eliminate instances of fraud. This comes down to a concept called SOD, or Segregation of Duties. Essentially, it means that no single person should be performing any two of the three following functions: Custody, Recording, and Authorization. Whenever those jobs are split up over multiple people, it's far less likely that they'll be able to take advantage of the situation they're in (provided that they wanted to in the first place).
For Theranos, it's not that someone was overstepping their boundaries - it's that nobody was performing these duties at all because no CFO was in place.
In the end, Elizabeth Holmes was found guilty of three counts of wire fraud against the various investment firms that had supported Theranos. She was also convicted of an additional charge of conspiracy to commit wire fraud against those same investors.
Had strong controls been in place, it's very likely that this wouldn't have been able to happen - which is ultimately why they're so important.
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
