Renee Ordeneaux and Fred Warga wrote an insightful article, “Trust But Verify,” for the latest issue of The Bottom Line, the company newsletter of RBZ, LLP (a Los Angeles-based accounting firm). They highlighted the latest report of the Association of Certified Fraud Examiners (ACFE): 2010 Report to the Nations on Occupational Fraud and Abuse
The topic of “risk management” is on everyone’s agenda, from auditors to boards of directors and regulators. We noted earlier that one of the most important parts of the Dodd-Frank Act was the heightened whistleblower provisions. The ACME study provides the foundation for this note: 40.2% of all fraud schemes studied were detected by a tip, whereas 4.6% were detected by external audit, 13.9% by internal audit and 15.4% my management review. Contrary to most discussions which allege that “it’s the board” or “it’s the CEO,” fraud is far more likely to be perpetrated by some desperate rank-and-file drone or middle management supervisor who lost his/her moral compass.
“Fraud perpetrators often display warning signs that they are engaging in illicit activity. The most common behavioral red flags displayed by the perpetrators in our study were living beyond their means (43% of cases) and experiencing financial difficulties (36% of cases).”
The blame-game loves to focus on those evil-doers in the corporate boardroom, or those CEO’s who are packing in exorbitantly excessive executive compensations. But, a closer look at today’s headlines begins to reveal just how “Ugly” average American business people have become -- without the help of those at the top.
Let’s take a look at a selection from recent headlines. Were these the directors? or were these Jane and Joe Does?
1. Hewlett-Packard Co. agreed to pay $55 million to settle Dept. of Justice allegations that the company paid “influencer fees” to systems-integrator firms in return for recommendations that federal agencies purchase HP products; other charges alleged that a 2002 contract with the General Services Administration for computer equipment and software was defectively priced because HP provided incomplete information to contracting officers during negotiations. EMC Corp. paid $87.5 million to settle similar charges in May 2010.
2. Intel derivative litigation settlement alleged the company violated a host of antitrust policies and practices since 2004; the agreement mandated 18 new compliance committee, general counsel, training and audit changes from the board level all the way down to sales and marketing.
3. For-profit universities discover their recruiters encourage applicants to lie on their requests for loans. Federal government support of student financial aid is at risk of insolvency because 75% of loans are not being repaid.
4. Workers and managers on the BP oil rig and at the Massey Energy mines intentionally shut off or closed down safety valves because the protections “got in the way” of business as usual, which included resulting catastrophes and death.
5. Mortgage brokers allegedly allowed or encouraged “liar loans” from applicants who provided fraudulent information on mortgage loan applications. Mortgage bankers today report they still must be vigilant to ensure that applicants do not file fraudulent information even after everything we’ve learned from the subprime mortgage crisis and bailout. Mortgage "refis" are questionable at best.
6. Lenders are discovered to have paid appraisers for inflated property valuations to overstate mortgages contained in mortgage backed securities.
7. Widespread increase in so-called “strategic defaults” on mortgages where the property value has dropped below the mortgage principal, although the property owner has the capacity to pay the mortgage. Bankers today report an increase in “bad buys” where a homeowner, preparing to do a “strategic default,” attempts to buy a new home without reporting the existence of the old, under-water loan, in order to have a safe haven prior to bailing out.
8. Insurance companies found to have paid agents under-the-cover fees to win business.
9. State pension fund board member alleged to have received payments from investment managers in exchange for an inside track as a contractor to buy/sell securities to the pension fund.
10. Pension fund board members reportedly neglect to file financial disclosure documents – not just once, but repeatedly in spite of fines.
11. Municipal representatives allegedly not domiciled in the districts where they were elected to serve. Council members receiving sweetheart loans and excessive compensation. Municipal representatives reap astounding compensation and pension benefits, under cover.
12. Credit ratings agencies found to have inflated bond valuations in order to win business from companies whose bonds or securities they rated.
13. Research analysts receive bonuses for favorable buy-sell stock recommendations of companies that do business with the financial firms who employ the analysts. From approximately mid-1999 through mid-2001 or later, ten of the nation’s largest investment banking firms engaged in acts and practices that created or maintained inappropriate influence over research analysts, thereby imposing conflicts of interest on research analysts that the firms failed to manage in an adequate or appropriate manner. In addition, the regulators found supervisory deficiencies at every firm.
14. Accounting firms are now prohibited from providing management consulting services to companies whose financial statements they audit because of the perverse cross-payments.
15. Compensation consultants to be required to disclose fees they received from companies where they provide executive compensation advisory services to prevent preferential treatment.
16. Violations of the Foreign Corrupt Practices Act accelerate. The FCP Act prohibits bribery payments to any foreign official in order to win business overseas.
17. Sales personnel at technology firms reportedly provide off-book retroactive rebates to buyers to win business through the fabrication of fraudulent revenue-recognition practices.
18. Accountants and general counsel at high tech start-ups back-date option grants to artificially increase stock bonuses for employees and management.
19. Banks on both sides of the
Atlantic, based on input from legal and tax advisors, conspire to establish phony off-shore entities as conduits and safe havens for tax evasion.
20. Banks manipulate “Repo” balances just before the end of month or quarterly financial statements are released in order to inflate earnings reports.
21. Medical doctors and insurance brokers reportedly collude to defraud the health reimbursement funds by fabricating illnesses, accidents, treatments and medical conditions.
22. Papers and dissertations are for sale on the Internet.
23. Surveys of students reveal alarming levels and tolerance of cheating “as a way of life.”
24. Widespread use of steroids in sports.
Why is there such extensive personal corruption in the American way of life, today?
Why do we so delight in gawking at the carnage of crashes on the highways of our lives (BP oil slick disaster, the Katrina flooding, Shirley Sherrod firing, Boston Police v. Harvard Professor confrontations) rather than mind our own ethical behavior and morality?
Why is there such righteous indignation and sanctimonious expectations of “socially responsible” behavior among entrepreneurs, corporations or government, yet so very little social conscience in our own personal economic and financial choices and behaviors?
Why is there such a great willingness to blame others for failings and to demand others’ take responsibility – but little or no individual personal accountability for performance? Do we really think that more “rules” alone will address these problems? And are we sure that “boards of directors” are the ones ultimately responsible for this tsumani of unethical behavior inside companies -- at the employee, worksite and management levels? Have American employees and management forgotten how to compete fairly? Do they believe that the only way they can succeed is by perpetrating fraud on each other?
ACFE summary page: http://www.acfe.com/rttn/2010-highlights.asp
(PDF version: http://butest.acfe.com/rttn/rttn-2010.pdf)
RBZ summer 2010 newsletter: http://www.rbz.com/home/2010SummerBottomLine-www.pdf