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Learnings from the Theranos scandal, and why internal financial controls are important in any organisation.
If you’ve been following the scandal with Elizabeth Holmes and her failed blood-testing startup, Theranos, you’ll know that money can very easily get into the wrong hands. If you haven’t, we highly recommend reading up on it here.
As one of the most famous trials of our time, the Elizabeth Holmes case reminds us of the importance of having good financial governance. If you’re studying accounting, finance or business law, this is something that is highly relevant to your work. For those doing a master’s, there’s even more focus on governance and finance controls, making you a vital part of the system.
Here’s a quick summary of what happened, and a look at why everything we do in finance matters.
Stanford dropout, Elizabeth Holmes, started Theranos, a company claiming to be able to perform multiple health checks with a new blood testing technology. The idea was to deliver over 240 different health tests (including cholesterol levels and complex genetic analysis) with just one single finger prick of blood.
The Theranos machine, “the Edison”, was said to be the end of venous blood testing, meaning healthcare patients would no longer have to face the needle. The only problem was, the machine (or its capabilities at least) was a complete work of fiction.
Despite Theranos technology not being able to do everything they claimed, the company managed to raise over $1.3 billion in funding from a number of investors, pulling the wool over everyone’s eyes, including many of its own employees!
Theranos was in operation for over a decade, with Holmes committing $700 million of fraud against investors and the public. So how did the company manage to thrive for so long before someone blew the whistle?
A lack of governance was the main reason, with the board (made up of politicians and military advisors) falling short of any medical background or knowledge. As influential as they were, the members of the board had no corporate governance experience either.
Holmes was also said to have created a toxic work environment, where the labs were extremely secretive so very few people were privy to the truth. Furthermore, governance always came second to her own authority, meaning it was impossible to have adequate internal financials controls and other frameworks of authority and accountability in place.
This case, like many famous scandals in recent years, is a sobering wakeup call to those who work in a corporate environment.
Good financial governance is having a system of rules, practices and processes by which a firm is directed and controlled. These practices should not be flexible, and should balance the interests of stakeholders while attaining the company’s objective.
This system must also include the monitoring of CEOs and other executives effectively. In the case of Theranos, this was not possible because Holmes maintained control in every area of the business.
If you are studying a finance course at university, make sure you read John Carreyrou’s book, Bad Blood. This is an investigative account about the scandal, and how the whistle blowers eventually found their voice. It’s a must-read for anyone studying this subject!
Interested in studying accountancy, finance, business management or business law at postgraduate level? As a leading Greater Manchester university that’s been in the Top 2 in the UK for Student Satisfaction in Accounting and Finance Courses* for the fourth year running, there’s nowhere better to begin your journey than the University of Bolton!
To find out more about applying in 2022, see our available courses.
*Complete University Guide, 2022, 2021, 2020 & 2019