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Fraud Conference Off to a Strong Start
AGA’s Second National Internal Control Conference kicked off Monday in Atlanta with a presentation by AGA Hall of Fame speaker Marianne M. Jennings, JD, professor of legal and ethical studies at Arizona State University on the topic of “Ethics in Government.” She began her talk by showing a list of the well-known frauds in the business world in recent years and followed it with a much longer list of fraud in the government sector. “To say you’re shocked that there’s fraud going on is just wrong,” she said. “These were not close calls. Embezzlement and bribery are not nuanced.” The bottom line, she said, is to understand how fraud happens. We have to ask, “What were they thinking when they engaged in that behavior?” Jennings recently marked her 30th year at ASU and continues to think we’ve turned a corner in the ethical environment in this country. But then, she said, she’ll open the paper and read of yet another egregious violation. “What is it that makes really good, smart people do dumb, unethical things?” Many of the worst violators had only parking tickets on their records before they were sent to jail on fraud convictions. She said there are seven common threads to most ethical lapses. First, there’s a pressure to maintain numbers in business. In government, the pressure is to meet budgets and goals while dealing with the added scrutiny of legislators and the media. “We send the wrong signal with good intentions by telling our people to ‘find a way,’ ‘do whatever it takes,’ or ‘sharpen your pencil.’ People misinterpret the signals we send. There’s a huge difference between working hard and skirting.” Second, there is usually an environment of fear and silence in cultures where fraud is later discovered. In every organization, she said, there’s a group of four or five people who know everything. “The key is getting what these people know to the right people,” she said. We think we have all the systems in place but there’s tremendous fear that stops people from reporting questionable activities. Adding to this is the negative way most organizations respond to people who raise ethical issues. Seventy-five percent of employees determine their ethical responses by watching the organization’s leaders. Third, she referred to “young ‘uns and bigger-than-life CEOs” who garner so much respect from the young people who work for them that those same young people would never think to question the actions or behaviors of their iconic leader. Dennis Kozlowski, the former CEO of Tyco who is now in prison, famously said, “I hire them just like me: smart, poor and wants to be rich.” Young people coming in just assume, Jennings said, “that’s the way it is.” They expect it and don’t report it. At the same time, studies show cheating in high school, college and graduate school is on the rise and ninety-nine percent of all people think their behavior is more ethical than that of everyone they work with. Fourth, she referred to weak boards or weak leadership. In particular, she noted conflicts of interest as a huge issue. Watch for complex interrelationships among employees. “You gotta dig deep and watch those personal relationships,” she advised, adding that she’s a big believer in MBWA—management by walking around. Employees are much more likely to tell a superior something in person than they are to put it in writing. Fifth, she discussed the culture of conflicts. Nearly all missteps by government agencies began and some ended with conflict issues. Believe in conflicts of interest, disclose them and don’t do it. “Where there are conflicts, there is trouble,” she said. Sixth, there’s a problem when employees believe the rules don’t apply to them. “The rules are for other people,” she said they believe. “You can’t fool around with the truth.” She referred to recent stories in the news about a husband whose infidelity was determined by checking tollbooth tags on his EZPass or the other unfaithful husband who sent flowers to his mistress and 1-800-Flowers sent a note to his wife asking how she liked them. The husband is now suing 1-800-Flowers for the gaffe. “The truth is one powerful force and it wants out there,” she said. Seventh and last, she urged attendees to watch out for the attitude that goodness in some areas atones for unethical or illegal behavior in others. Often the greatest frauds occur in cultures of great philanthropy, innovation and diversity. When you’re looking for fraud, she said, look for the goodness in people’s lives. Look for those who are heavily involved in charities and philanthropy and ask the question—are they using these deeds to atone for lesser behaviors? “You have to really watch the ones who talk a good game,” she said. Jennings concluded with several overarching themes. Watch for the gradual slippage that comes with complacency. Watch for people who operate in “the gray area.” There are no gray areas in ethical behavior. Finally, she said leadership and examples matter. Unless you are prepared to put your job on the line to report malfeasance or unethical behavior, then you have not truly become an ethical person or an effective auditor. Arthur A. Hayes, JD, MBA, CGFM, CPA, CFE, director of state audit in Tennessee, teamed up with Tallahassee City Auditor and AGA Past National President Sam M. McCall, CGFM, CPA, CIA, CGAP, to discuss some of the themes that will be discussed during the two-day fraud conference. Hayes quoted a favorite Dennis the Menace cartoon when he talked about excuses. “The truth,” he said, “Is what you tell when you run out of good excuses.”
He referred to an audit engagement where the management told his staff that they were taking the organization’s policies and procedures “too literally,” which drew a big laugh from the audience of nearly 400. Hayes talked about complacency, saying, “It’s hard to push, isn’t it?” and added that the public doesn’t expect government to be ethical. “How could they?” he asked, referring to the endless media reports about government waste and abuse. Hayes told a comical story about his first audit engagement for the state of Tennessee. He had practiced law for several years before signing on to state government and after his first engagement, he was so incensed by the lack of accountability on the part of management that he prepared a lawsuit against them. He left the suit on the desk of then-director of state audit Frank Greathouse, who called the idealistic Hayes into his office. “You’re new to government,” the famed Greathouse said, “aren’t you, son?” People are looking for consequences, Hayes said, adding that if there are no consequences there are no controls. Don’t worry about finding fraud, he tells his people. Look for the waste (which he refers to as mismanagement) and the abuse (gross negligence) and they will lead you to the fraud. “I want folks to think more broadly,” he said. “If we find waste, we have to go further, I believe.” McCall discussed the various components to internal control and then asked Hayes to comment on them. “Risk assessment,” Hayes said, “to me is the cornerstone when we’re talking about management’s role and prevention.” He referred to a scandal at the University of Tennessee that led to audit committee legislation. “Scandals are opportunities,” he said. “You have to realize how you can now use this to your advantage.” The audit committees review risk assessment and determine the internal controls management needs to have in place. “(The audit committee) gets another set of people on our side,” Hayes said, adding that we need additional protections for whistleblowers. If you tell people they can file anonymous reports that are then made public through sunshine laws and freedom of information requests then whistleblowing becomes that much less attractive to people who might otherwise be inclined to do the right thing. Controls must also include independent monitoring, Hayes said. “This is important because if people know someone’s watching them and they can’t control things, they’re going to be more honest. It’s that simple.” McCall listed the surprising characteristics of people most likely to commit fraud—they are bright, married, between the ages of 18 and 36, with two kids, homes they own, no history of drug use, and a complete failure to see or understand the harm they are inflicting on their victims. Often they have a strong sense of challenge and game playing and hold positions of trust. Who reports fraud? McCall pointed to the following statistics: · Employees, 26 percent of the time · Accidental discovery, 18.8 percent · Internal audit, 18.6 percent · Internal controls, 15.4 percent · External audit, 11.5 percent · Tip from customer, 8.6 percent · Anonymous tip, 6.2 percent · Tip from vendor, 5.1 percent · Notification from law enforcement, 1.7 percent McCall listed a number of characteristics to watch for in employees who might be committing fraud. They include the refusal to take vacations, sudden change for the better in lifestyle, inadequate descriptions or explanations for payments, and large numbers of payments to a single vendor, among others. He detailed a $3 million fraud that occurred in the City of Tallahassee and concluded by saying that if one person had asked the simplest of questions—why is the city buying race car engines?—the whole thing might have been avoided. A conviction for a fraud as minor as $500 in Tallahassee, McCall said, can wipe out the pension of a 30-year employee. “I believe one person can make a difference,” Hayes concluded. “It has to start with one person.” —By Marie S. Force |
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