Image by Getty Images via DaylifeSeattle Startups are having a deep conversation out on the Seattle Tech Startup list tonight as Entellium CEO and CFO appeared on court on charges of Wire Fraud. All the press in town has picked this one up, with just about everyone asking the question, whatever happened to the independent audit of the company. Of course, when someone is deliberately hiding the fact that they are not making the revenues that they say they are making, this is going to be very hard to discover if the CEO and CFO are in on the deal.

Entellium Chief Executive Paul Thomas Johnston, 40, of Mercer Island, and the company’s financial officer, Parrish L. Jones, 39, of Seattle, were charged Wednesday with wire fraud for allegedly grossly inflating the company’s sales to attract more than $50 million in private capital. Source: Seattle Times

Beyond the list though, there are a number of issues that crop up that should have been (20/20 hindsight) done, like a completed audit. Unfortunately, this also leaves the audit company open to a deeper inspection of how they do their work. The saddest part of all though, is that last week when I attended the Meet the Angels meeting with the MIT Venture Lab, we all knew times were tough, but there was a level of trust in the room.

By having a startup go through 50 million dollars worth of funding, based on cooked books is going to make it harder for legitimate business to get the money they need. There has to be a level of trust between the companies, the one making the investment, and the one getting the investment. When something like this happens, every single company is going to have to make sure they are trust worthy to an even greater degree than they had to previously. While this might not be a bad idea, to get a 3rd party audit of your company can cost about 40K depending on whom you go with.

Smart VC’s and Smart Angels are going to ask for this upfront, or they are going to commission one, just to make sure that the company is really who they say they are, and that they are in the condition they say that they are in. It is that loss of trust that is going to add more time to the investment process rather than take away from it.

Entellium did not just hurt every startup going for money; they hurt the VC and Angel community as well. They hurt everyone by blowing the trust we have to have in each other to make business happen. Much like the mistrust between banks right now that has frozen the credit market, lets hope that this kind of mistrust does not do the same for the Seattle tech startup community. We rely and need our VC’s and our Angels, having their trust and money abused like that is phenomenal that it happened. Let’s hope that the VC’s and Angels don’t add to the delay curve, but if they do, plan on it, make sure that if you are getting money as a company, it might not be a bad idea to just go ahead and do the independent audit anyways, just to alleviate fear.

Tags: seattle, fraud, Entellium, ceo, cfo, arrested, charged, wire fraud, sts, seattle tech startups, vc, angel, funding, trust, broken