Where is compliance headed in the 2020’s? Certainly, technological solutions will be a big part of the future of compliance programs and controls. Compliance will also continue to emerge and be viewed as a critical business process; departing from the days in which it was driven by legalese and where lawyers are responsible for crafting compliance policies and procedures. These advances provide opportunity for innovation, and enable compliance to recede from being viewed as a cost center led by the “head of business denial”, to being viewed as value added function to the business. Simply put, a more effective compliance program contributes to more efficient business processes, which leads to greater profitability.
This idea of embracing compliance as a business process has been emerging for some time. In this first decade of the 21st century, when FCPA enforcement actions dramatically increased, many companies saw compliance programs, policies and procedures as responses to increased government enforcement. Hence, the legal basis for compliance; where Codes of Conduct were 30 to 50 pages long, policies written in dense legalese and often with legal citation, procedures implemented bespoke, and the results stored manually on spreadsheets. It was time consuming, incredibly costly, and considerably inefficient. Yet this is what the Department of Justice expected to see when companies under investigation came to Washington DC for meetings with the attorneys overseeing their FCPA investigations.
Through these meetings, the Department of Justice began to see the process-driven nature of compliance. This view was captured for the public in the 2012 FCPA Resource Guide, issued jointly by the DOJ and SEC, in which they provided the Ten Hallmarks of an Effective Compliance Program. Under Hallmark IX, Continuous Improvement: Periodic Testing and Review, the 2012 Resource Guide stated, “An organization should take the time to review and test its controls, and it should think critically about its potential weaknesses and risk areas.” This led to the conclusion that “Although the nature and the frequency of proactive evaluations may vary depending on the size and complexity of an organization, the idea behind such efforts is the same: continuous improvement and sustainability.” This standard clearly articulates that improvement relates to process improvement, which leads to continuous improvement.
Fast forward to 2020 and the release of the 2019 Guidance on Evaluation of Corporate Compliance Programs (“Guidance”), which is an evolution from the 2017 FCPA Corporate Enforcement Policy and its additions, because it emphasizes how the DOJ has embraced corporate compliance programs by applying the Guidance to the entire Criminal Division—not just the Fraud Section.
For example, the regulators have increased their focus on a company’s overall culture, which can be indicative of its compliance culture. The most effective way to promote a culture of compliance is to embed the compliance program into the fabric of the organization. The DOJ developments contribute to the operationalization of compliance programs by moving compliance performance away from the corporate compliance function, and into the business front lines where it can have the greatest impact. Continuous improvement of compliance is no longer considered a cutting edge practice or even a best practice, but simply a standard practice for every effective compliance program.
Compliance as a Business Process
This shift from compliance as a legal response to compliance as a business process requires a different set of skills that are traditionally taught to lawyers during law school, in public practice, or in-house roles. This shift requires keen business acumen and knowledge of business processes. It also requires robust data analytical skills; specifically, the use of data to make decisions that improve business processes. Most importantly, data analytics in compliance programs will cause companies to depart from their current reactive approach, in favor of a more proactive and prescriptive approach to mitigating compliance risks. This risk-based approach requires analyzing the data, interpreting the results, evaluating internal controls, understand behavior, and then using those interpretations to make continuous process improvements.
Consequently, this will mean a change in thinking. While a lawyer or legally trained professional can certainly head a corporate compliance function, it should be obvious a more diverse palette of professional skills are now required. These competencies will be required in the corporate compliance function in this decade and beyond.
Compliance professionals must have the ability to adapt to this changing world. If you are in compliance and do not currently possess the skills mentioned herein, it may behoove you to surround yourself with professionals that fill your gaps. For you may well find yourself unable to perform your role effectively, run of risk of being replaced, or the target of a regulatory inquiry.
Remember as Yogi once said, “If you don’t know where you are going, you’ll end up someplace else.
I welcome you thoughts and ideas. Feel free to contact me by clicking on the link below my picture.
This one day fraud symposium, sponsored by Baker Tilly’s Global Forensic, Compliance and Integrity Services and Solutions Practice Group and hosted by the Institute of Internal Auditors, Philadelphia Chapter, will include topics such as:
Jonathan is the firm leader of the global fraud and forensic investigations and compliance practice. He has more than 30 years of experience working closely with his clients, their board, senior management and law firms on global and cross-border fraud and misconduct investigations, including bribery, corruption and compliance matters. He is a well-regarded author and speaker, who has gained international recognition for developing thought leadership that has enhanced the profession.
Niki A. den Nieuwenboer, Assistant Professor of Organizational Behavior and Business Ethics, The University of Kansas School of Business
“Tone in the Middle”
We know that leadership matters in fostering ethical conduct at work. However, the focus is often on top level managers and their “tone at the top.” The role of middle managers has remained somewhat of a mystery until now. Niki den Nieuwenboer will discuss her recent study that examined a case where middle managers, in response to upper management pressures, coerced front-line employees to deceive upper management about their performance. She will spotlight the creative role that middle managers played in finding ways to cheat, and discuss implications for ethics management and fraud prevention.
The new DOJ guidance on effective compliance programs is full of requirements to assess risk and manage the compliance program through a risk-based method. Culture is also of importance, and ensuring a culture of compliance is emphasized in the guidance. Having a compliance risk methodology that incorporates compliance, ethics, and culture to identify areas of risk is key to ensuring limited resources get directed to the right place.
“Investigations: Strategies to avoid common pitfalls”
Conducting an effective and thorough investigation into alleged wrongdoing has always been a hallmark of an effective compliance program. Unfortunately, many of the investigations fail to achieve their intended results.
Ed Broecker will address some of the common pitfalls to avoid in conducting an internal investigation. The session will discuss initial intake and appropriately triaging the allegation and developing the correct team and work plan to conducting interviews. The discussion will also address report writing and determining the root cause. This session will highlight many of the shortcomings in an investigation and offer practical suggestions for addressing them including issues around bias, privilege, confidentiality/privacy and reporting back to the complainant.
“The Code of Conduct – Effective Policy Development and Management”
The Code of Conduct sets the tone and reinforces the importance of conducting business within the framework of professional standards, laws, and regulations, together with policies, values, and standards. It outlines the values and behaviours that define how organizations do business. It holds people accountable to be open-minded and responsive and to give their best.
Policies & procedures must be in place to safeguard and educate staff, to protect the organization against unnecessary risk, ensure the consistent operation of the business, uphold ethical values of the organization, and to defend the organization should it land in turbulent legal waters.
However, effectively developing and managing policies is easier said than done.
Good policies generally are –
Written in clear, concise, simple language.
Policy statements address what is the rule rather than how to implement the
Policy statements are readily available to the campus community and their
authority is clear.
Designated “policy experts” (identified in each document) are readily
available to interpret policies and resolve problems.
As a body, they represent a consistent, logical framework for organizational action.
in practice, we know that ad hoc or passive approaches mean that key policies are outdated, scattered across the business, and not consistent– resulting in confusion for recipients; and an insufficient level of governance and reporting for auditors and regulators.
It is no longer enough to simply make policies available. Organizations need to guarantee receipt, affirmation AND understanding of policies across the business.
To consistently manage and communicate policies, organizations are turning toward defined processes and technologies to manage the Policy lifecycle. The continual growth of regulatory requirements, complex business operations, and global expansion demand a well thought-out and implemented approach to policy management.
Attendees will be guided through a discussion on how to develop and implement an effective policy management process within their organization.
“Whistleblower Activity: What’s Good, What’s Real, What Matters”
Compliance and audit professionals all talk about the need for a strong culture of whistleblower encouragement and protection. This session will review what some new data tells us about whistleblowing and corporate culture, and how risk assurance functions can develop a healthy appreciation for internal reporting.
How do levels of internal reporting correlate to corporate performance?
What types of whistleblower allegations are most likely to be true?
How should boards and risk assurance functions handle whistleblowing, based on what the data tells us?
This session will explore some of the data that professor Kyle Welch has been crunching, and some of the counter-intuitive findings he’s dug up. Then talk about how those findings would color what compliance, audit, and anti-fraud people do for investigations and working with senior leaders to cultivate a strong internal speakup culture.
Location Exelon Hall – Just enter the building lobby at 23rd and Market Street and follow the signs down the stairs to Exelon Hall. No building access is needed for access to the hall.
Continuing Professional Education Credits – The Philadelphia Chapter of the Institute of Internal Auditors is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.
*Speakers and Topics may change due to a variety of factors. We will do our best to adhere to the agenda.
The United States government’s fiscal year ended September 30, 2019. Just as in the business world, where many companies try and clear out any unexecuted deals or open contracts, the Securities and Exchange Commission (SEC) cleared out three outstanding Foreign Corrupt Practices Act (FCPA) enforcement actions. The three enforcement actions involved Quad/Graphics Inc., a Wisconsin-based digital and print marketing provider and its Peruvian subsidiary, Quad/Graphics Peru S.A.; Barclays PLC; and a Canadian clean fuel company Westport Fuels Systems, Inc. and its former Chief Executive Officer (CEO), Nancy Gougarty of Leesville, South Carolina. The terms of each settlement agreement provide a different lesson for compliance practitioners.
Quad/Graphics – Be Alert for Sham Vendors
According to the SEC Press Release and related order, Quad/Graphics’ actions violated the FCPA in several instances identified by the Commission from 2011 to 2016. Their international troubles began with the 2010 merger of Canadian printing company World Color Press, Inc. The merger introduced a significant international presence for Quad/Graphics, yet accounting controls, anti-corruption policies, and an FCPA compliance program were not in place. Simply put, the compliance function was not preemptively prepared for the new influx of international issues. The company was slow to prioritize attention to these issues, and equally slow to begin the process of introducing the necessary measures to combat them. Consequently, Quad/Graphics’ Peruvian subsidiary, Quad/Graphics Peru S.A., was found to have deployed questionable business practices to win business contracts and to avoid penalties in tax litigation, using fraudulent third party vendors to carry out the bribes. The company has agreed to pay $6,936,174 in disgorgement, $959,160 in prejudgment interest, and a $2 million civil penalty, for total monetary relief of nearly $10 million.
In addition to the challenges in Peru, following the merger of World Color, Quad/Graphics maintained the acquired business relationships with Cuban counterparts in spite of U.S. sanctions and export law restrictions. In doing so, they concealed the transactions internally through written communication and by falsifying financial records which serve as proof of their illegal behavior. It is also identified in the commission’s order that illicit payments to various Chinese officials and employees in Chinese companies were either promised or made in order to secure sales in an otherwise limited market. Both instances further the argument that Quad/Graphics was not prepared for the international business which they took on.
In order to understand the key lesson in this case, we must consider the creation of, billing by, and payments made to the purported third party vendors or the “Sham Vendors”. Regarding the billing, the Order stated, “two concerned managers in Peru approached him [Finance Director] about several suspicious invoices that had recently been submitted by two of the Sham Vendors. Several of the invoices contained red flags of bribery and corruption, including having the same date and dollar amounts and consecutive invoice numbers. Upon review, the new Senior Finance Manager agreed the invoices were problematic and declined to approve them.” Other red flags present on the Sham Vendors invoices included “vendor invoices with rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered (sometimes with the same date) and invoices without purchase orders or other supporting documentation.” On the payment side, although there were some wire transfers made to the Sham Vendors bank accounts, a large number of invoices were paid “by checks that were hand delivered to the Sham Vendor’s principal or the Sham Vendor’s accountant in Peru.” Upon inspection, the commission noted that 3 of the 4 Sham Vendors had the same address and none had any real business operations.
Barclays – Don’t Forget the Basics
Barclays is well known for its prior regulatory stumbles in the banking sector, and for the actions of its Chief Executive to unmask an anonymous whistleblower. Barclays experienced additional grief from an FCPA enforcement action, based upon hiring practices in the Asia Pacific Region (APAC). According to the SEC Press Release, Barclays’ employees hired 117 candidates with connection to their non-government clients or to foreign government officials. It was understood the hiring of these candidates was exchangeable for current or future business opportunities. Barclays agreed to pay $6,308,726, consisting of disgorgement of $3,824,686, prejudgment interest of $984,040 and a $1.5 million civil penalty as a result of the SEC findings.
In addition to the instances of violations cited in the Order in which compliance employees acted knowingly in their unethical hiring practices, or where employees responsible for hiring were circumventing the compliance function, the Order also cites several instances in which blissful ignorance contributes to the company’s illegal actions. Examples of senior executives who were not only unaware of the basic anti-corruption conduct prohibited by the FCPA, but also the specific prohibitions of hiring relatives of foreign officials “quid pro quo” are identified in the commission’s findings. This lack of training on the very basics of the FCPA and also of elements of anti-bribery/anti-corruption compliance is something that every compliance professional needs to be reminded of. Training is a foundational component of any well-designed compliance program and simply cannot be ignored.
The Barclays enforcement action presents some very (back to the) basics lessons for the compliance professional. First, you must consider the effectiveness of your compliance programs: Are they current? How are they being tested? Second, you must consider your corporate gatekeepers: When was the last time you tested gatekeeper roles performed by your compliance function to verify they are actually being performed correctly? Are those gatekeepers aware of what is required of them? Maybe it’s time to start asking some questions.
Westport Fuels Systems, Inc. – Control Fraud
The third FCPA resolution involved Westport Fuels Systems, Inc., a Canadian clean fuel technology company headquartered in Vancouver, Canada, and its former CEO, Nancy Gougarty.
The unusual features of this corruption scheme were two-fold. The first was the bribery scheme itself. While there have been previous FCPA enforcements where the interest in an entity was the quid of the quid pro quo; this scheme was a more sophisticated operation.
For all of these FCPA violations, Westport also agreed to pay $2,546,000 in disgorgement and prejudgment interest and a civil penalty of $1,500,000, and Gougarty agreed to pay a civil penalty of $120,000.
The problem for Westport started when the company wanted to take the Chinese JV public through an IPO and were falsely informed that the newly formed public company had to be majority Chinese-owned in order to do so. During this process, it was uncovered that the Chinese Government Official who was working for the State Owned Entity (SOE) that was the largest shareholder of the IPO prospect company, had a financial interest in the private equity firm targeted to manage the IPO. This fact was brought to Gougarty’s attention, utilized in the negotiation process, and intentionally concealed from Westport’s board of directors. The deal called for shares of the joint venture to be transferred into the private equity fund in exchange for a dividend payment from the State Owned Entity. Tight for cash due to a decline in sales, the CEO was eager to finalize this transaction. Consequently, she allowed the shares of the JV go undervalued when transferring to the private equity firm.
Further, in addition to the dividend payment, Gougarty was eager to secure new business as a result of the transaction. She at first suggested, and later demanded that a framework supply agreement be included in the terms of the deal. The CEO “explicitly conditioned the share transfer on obtaining a long-term sales agreement” and instructed her team on the ground that “no component sales contract, no share transfer”. This about as quid pro quo as you can get.
After the bribery scheme was effectuated, Gougarty continued her fraudulent conduct by falsely identifying payments to another entity rather than the true counterparty, the private equity firm. She compounded this fraud, in connection with the filing of the Form 40-F, falsely executing a certification attesting “that Westport had disclosed all significant deficiencies and material weaknesses in the design and operation of its internal controls to the outside auditors”. In reality, Gougarty was responsible for falsified transactional data in the financial reporting related to the bribery scheme. She also failed to disclose the internal control weaknesses that allowed her to do so.
Gougarty’s conduct appears to be “control fraud”.
Control fraud occurs when a trusted person in a high position of responsibility in a company, corporation, or state subverts the organization and engages in extensive fraud for personal gain. The term “control fraud” was coined by William K. Black to refer both to the acts of fraud and to the individuals who commit them.
Subversion in this case refers to the circumvention or overriding of internal controls or policies and procedures. This scheme was designed to create a “pot of money” to fund another type of fraud, bribery and corruption.
When you have the CEO herself engaging in this type of behavior you have to ask where was the board of directors? How was she selected? What did senior management know? This was a very expensive lesson.
These three SEC enforcement actions all provide important lessons for the compliance practitioner. The actions should be not only studied by compliance professionals, but also the lessons passed along to business unit personnel to further alert employees of red flags of bribery and corruption schemes that may be present in the business operating environment. Finally, never forget the basics of the FCPA and the importance of proper education around the Act; what it mandates and more importantly, what it prohibits.
On November 20th, 2019, The Department of Justice (“DOJ”) announced updates to its Foreign Corrupt Practices Act (“FCPA”) Corporate Enforcement Policy. While the changes were relatively minor, the modifications underscored important principles surrounding the FCPA Corporate Enforcement Policy.
This latest update followsextensive revisions made in March of this yearand the announcement that the FCPA Policy will apply as non-binding guidance for all criminal cases; all reflect DOJ’s continued efforts to promote self-disclosures and provide clarity on DOJ’s approach for companies deciding whether to self-disclose.
There is little doubt the DOJ has landed on a Corporate Enforcement Policy that took years to develop. The FCPA Corporate Enforcement Policy now applies to all corporate criminal prosecutions except Antirust Division criminal prosecutions that are guided by the Leniency Program. The DOJ is consistently applying the principles and appears to be very comfortable with the results.
At the same time, DOJ has increased transparency in its resolution of corporate enforcement actions. DOJ now publishes declination letters and provides specific descriptions of how factors are applied to a corporate resolution. Note: At the time of this writing there were six (6) corporate resolutions.
The Policy is intended to encourage corporations to self-report, cooperate and remediate – in exchange for a possible declination or significant reductions in penalties. The updated Policy tilts in favor of prosecution of responsible individuals and part of the DOJ’s commitment to seek out and punish wrongdoers.
The Policy now states that a company must disclose “all relevant facts known to it at the time of the disclosure.” DOJ added a footnote, stating that it “recognizes that a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure.” A company that makes a disclosure while continuing its investigation should make this fact known to DOJ.
Further, to encourage companies to make an early disclosure, the Policy now requires companies to disclose facts “as to any individuals” who played a substantial part in the “misconduct at issue.”
The previous Policy required companies to disclose “all relevant facts” regarding individuals substantially involved in a “violation of law.” A company making a disclosure no longer has to reach a determination (and inform DOJ) that a “violation” occurred at the beginning of an investigation.
Similarly, companies now need only alert DOJ of evidence of the misconduct when they become aware of it. Previously, in order to gain credit, where the company was or should have been aware of relevant evidence outside of its possession, the company had to identify such evidence to DOJ. The Policy has been updated to remove the conditional language, which should ease the burden on companies seeking to comply with the Policy.
Accordingly to Mike Volkov, the updates to the Policy highlight DOJ’s desire for self-disclosures that are both substantive and made at an early stage. They are also practical, in particular removing the requirement that a company identify evidence of which it “should be” aware. The changes are in line with other recent DOJ policy changes, seeking to recognize practical realities of the policies.
With the recent changes to the policy, companies now are obligated only to disclose relevant facts known “at the time of the disclosure” and to provide information regarding any — not all — “individuals substantially involved in or responsible for the misconduct at issue.”
Importantly, companies need not wait to determine that a violation of law has occurred and may report suspected misconduct. As stated in a footnote, this modification reflects the DOJ’s recognition that disclosing companies “may not be in a position to know all relevant facts at the time of a voluntary self-disclosure.” In that case, companies are urged to fully disclose suspected misconduct “based upon a preliminary investigation or assessment of information.”
Volkov further stated, these changes are important because DOJ has clarified the precise information that a self-disclosing company must provide to trigger the potential benefits possible under the policy. From a practical standpoint, companies faced a difficult choice — disclose a potential violation based on a cursory investigation subject to DOJ’s determination that the company failed to disclose “within a reasonably prompt time.”
The DOJ’s modification directs companies to report what they know upon discovery of a suspected violation, while making clear to the DOJ that the disclosure is based on a preliminary findings.
Under the recent revisions, companies are no longer expected to identify every piece of evidence of which they should have been aware or potential collection by the DOJ. Instead, companies now are obligated only to identify relevant evidence not in their possession of which they actually are aware.
The modifications eliminates some of the risk that DOJ could determine that a company was not entitled to cooperation credit when DOJ identifies evidence that a companyshould have known about.
DOJ’s recent revisions indicate that it is satisfied with its Policy and want to make it work even better. By addressing some theoretical concerns that may have caused companies not to disclose potential violations, DOJ is taking steps to encourage companies to step forward and disclose potential violations.
Since its introduction as a pilot program and subsequent adoption into the Justice Manual a few years back, the DOJ has continuously honed its FCPA Policy—each time encouraging prompt but thorough self-disclosures.
Boards of Directors and Senior Leadership should take notice of DOJ’s policy changes and DOJ’s attempts to encourage such disclosures and adjust their tactics and strategy accordingly.
Specifically, it becomes even more important to have experienced investigators that can “ring fence” issues early! This will help in deciding whether or not to self-disclose in order to maximize the potential benefits of the FCPA Policy.
Welcome to my site. I have spoken and been the keynote speaker for many conferences, including the ABA, ACC, ACFE, IIA, and IMA to name a few. I have designed customized training for the board, senior leadership, legal, compliance, internal audit, and others for some of the world’s largest organizations.
“I have had the pleasure to hear Jonathan Marks speak on a number of occasions. …most recently at a Fraud conference sponsored by the Long Island Institute of Internal Audit. Jonathan gave a dynamic and engaging half day presentation on fraud in financial reporting. He engages his audience with his expertise and knowledge of risk management, fraud and internal audit. His ability to share his experiences in fraud investigations over the past thirty years coupled with his interactive approach with his audience made for a compelling and memorable presentation.” Chief Audit Executive
If you are interested in booking me for your next event or need customized training, please email me with the date or dates, location and address of presentation, the audience make-up, the subjects you would like covered, and the duration of the talk or training.
I have provided you with some Selected Training Programs (See below) and please peruse my blog posts for some additional topics and ideas. Keep in mind I speak and provide training on most anything related to governance, risk, and compliance, with a focus on fraud and forensics.
I will do my best to get back to you quickly.
Jonathan T. Marks, CPA, CFF, CITP, CGMA, CFE and NACD Board Fellow
Selected Training Programs
Management Override of Internal Controls
The risk of management override of internal controls to commit fraud exists in any organization. When the opportunity to override internal controls is combined with powerful incentives to meet accounting objectives, senior management might engage in fraudulent financial reporting. This session will examine management override, focusing on the differences between the override of existing controls versus other, more prevalent breakdowns. It will also explore actions to help mitigate the threat of management override, approaches to auditing for management override and the psychology behind management’s override of controls. You Will Learn How To:
Identify red flags of management overriding controls
Ascertain an approach to auditing for management override
Assess the latest trends and research regarding management override of controls
Develop a better fraud risk assessment that highlights areas and gatekeepers that might have a greater chance of overriding controls.
Operationalizing Compliance – Master Class with Tom Fox, Esquire
The Master Class developed by Tom Fox, provides a unique opportunity for any level of FCPA compliance practitioner, from the seasoned Chief Compliance Officer (CCO) and Chief Audit Executive (CAE), Chief Legal Counsel (CLO), to the practitioner who is new to the compliance profession.
If you are looking for a training class to turbocharge your knowledge on the nuts and bolts of a best practices compliance program going forward, this is the class for you to attend. Moreover, as I limit the class to 20 attendees, you will have an intensive focus group of like-minded compliance practitioners with which you can share best practices. It allows us to tailor the discussion to your needs. Mary Shirley, an attendee at the recent Boston Master Class said, “This is a great two-day course for getting new folks up to speed on what matters in Compliance programs.”
Tom Fox is one of the leading commentators in the compliance space partners with Jonathan T. Marks to bring a unique insight of what many companies have done right and many have done not so well over the years. This professional experience has enabled him to put together a unique educational opportunity for any person interested in anti-corruption compliance. Simply stated, there is no other compliance training on the market quite like it. Armed with this information, at the conclusion of the Doing Compliance Master Class, you will be able to implement or enhance your compliance program, with many ideas at little or no cost.
The Doing Compliance Master Class will move from the theory of the FCPA into the doing of compliance and how you must document this work to create a best practices compliance program. Building from the Ten Hallmarks of an Effective Compliance, using the questions posed from the Evaluation of Corporate Compliance Programs and the FCPA Corporate Enforcement Policy as a guide, you will learn the intricacies of risk assessments; what should be included in your policies and procedures; the five-step life cycle of third-party risk evaluation and management; tone throughout your organization; training and using other corporate functions to facilitate cost-effective compliance programs.
Highlights of the training include:
Understanding the underlying legal basis for the law, what is required for a violation and how that information should be baked into your compliance program;
What are the best practices of an effective compliance program;
Why internal controls are the compliance practitioners best friend;
How you can use transaction monitoring to not only make your compliance program more robust but as a self-funding mechanism;
Your ethical requirements as a compliance practitioner;
How to document what you have accomplished;
Risk assessments – what they are and how you can perform one each year.
You will be able to walk away from the class with a clear understanding of what anti-corruption compliance is and what it requires; an overview of international corruption initiatives and how they all relate to FCPA compliance; how to deal with third parties, from initial introduction through contracting and managing the relationship, what should be included in your gifts, travel, entertainment (GTE) and hospitality policies; the conundrum of facilitation payments; charitable donations and political contributions, and trends in compliance. You will also learn about the importance of internal controls and how to meet the strict liability burden present around this requirement of FCPA compliance.
Ethics and Governance Training
This session will cover how ethics is key to good governance and how governance fits into your anti-fraud program. Moreover, we will explore the components of a Sample Code of Ethics, the cost of ethical lapses, organizational situations that encourage bad behavior, the new ethics paradigm, and how to spot a moral meltdown.
Corporate Governance During a Crisis
We also discuss leading practices in crisis management and present several scenarios allow the participant(s) to work though mock crisis scenarios. For example, in your first week at your company, you just received information about an alleged massive fraud and you are now in a crisis. In this session, members of the audience will play different roles within the company (members of the board, legal department, managers, etc.) to have a discussion, including:
What type of crisis plan do you have, if any?
What to do and how to formulate a plan of action?
Who to call first, how to prioritize tasks, and where to prioritize resources?
Who (internal and external players) to get involved and when to get them involved
What data is needed when a crisis hits?
How to prepare for the media and when to reach out?
How to communicate with customers, vendors and suppliers, regulatory agencies, and other parties?
Fraud Risk Assessment Process and Guidance
Many professionals struggle with developing a fraud risk assessment that is meaningful. We discuss the objectives of a fraud risk assessment, the components of a fraud, and key considerations for developing an effective assessment. Then we explore the sources of risk, the fraud risk universe, and some of the key components of the assessment. Lastly, we walk through the key steps in the assessment process and walk through a sample fraud risk assessment that considers COSO’s Principle 8, which contains considerably more discussion on fraud and considers the potential of fraud as a principle of internal control.
FCPA (Bribery and Corruption): Building a Culture of Compliance
This session covers why compliance is important and the new guidance issues by the DOJ. We also explore current regulatory enforcement trends, whistleblowers Under Dodd-Frank, the U.S. Federal Sentencing Guidelines, risk-based third-party due diligence, way to thwart an investigation, differences and similarities between the FCPA and the U.K. Bribery Act, successor liability, and provides the participant with a proven 13-Step Action Plan.
Knowing what to do when an allegation of fraud is presented is critical. Failing to understand the process could jeopardize the ability to prosecute wrongdoers. This session discusses why investigations are important, inherent risk and exposures, the types of investigations: internal and independent, board considerations, triaging an allegation, investigative challenges, and keys to running a successful investigation, and why root cause analysis should be considered after completing the investigation.
Third Party Risk Management and Oversight
Third party risk is the biggest nemesis when it comes to FCPA violations. This session discusses the key components of a compliance program and why it needs to be evolving to meet the business and compliance challenges, which are constantly occurring across the globe. We explore the latest DOJ guidance on the evaluation of corporate compliance programs. We build our discussion on the foundation of the key steps to be included in a third-party risk management program and cover some of the red flags of agents and consultants.
Putting the Freud in Fraud: The Mind Behind the White Collar Criminal
To properly fight corporate fraud we need to understand how a fraudster’s normal differs, so executives, managers and board members can develop more effective anti-fraud programs that take into account the behavioral and environmental factors that are common in cases of white-collar crime. By establishing an environment in which ethical behavior is expected — and by understanding how white-collar criminals look at the world differently — it is possible to begin closing the gaps in internal controls, develop a proactive fraud risk assessment and response program and significantly reduce the financial and reputational risks associated with fraud.
In this session, we take a closer look at the personality traits of individual perpetrators of massive fraud.
Discuss the basics of profiling and identifying elements of behavior common among white-collar criminals.
Discover what role company culture plays in the commission of fraud.
Hear cutting-edge ideas and methods to help detect and deter fraud.
This session is a “nuts and bolts” discussion about fraud and responding to fraud in an effort to reduce the incidence of fraud and white-collar crime. We go into the characteristics of fraud, who commits fraud, the fraud triangle and Pentagon™, the components of fraud, the regulatory environment & the focus on increased personal responsibility, internal controls to deter and detect fraud, and anti-fraud programs.
Triaging a Whistleblower Allegation
As corporations continue to adopt whistleblower programs, many find themselves struggling to manage burgeoning caseloads. As a result, serious internal fraud investigations can be delayed (with mounting losses) while less consequential complaints are being investigated. The lack of a timely, systematic and repeatable process for evaluating and prioritizing whistleblower tips, which can also expose an organization to increased regulatory risk. While there is no single, “right” method for following up on whistleblower complaints, this session discusses Why Investigating allegations or tips are important, why timeliness matters, investigation challenges, and provides the participant with a sample approach.
Skepticism: A Primary Weapon in the Fight Against Fraud
What happens when we don’t ask why? Professional skepticism occurs when those responsible for fighting fraud take nothing for granted, continuously question what they hear and see and critically assess all evidence and statements. This session we discuss the role of independent reviewer or inspector, particularly of your own assumptions, whether you are placing undue weight on prior risk assessments or discounting evidence inconsistent with your expectations, and pressures placed on you to truncate procedures or make unwarranted assumptions to beat time constraints.
Root Cause Analysis
The regulators are expecting more today and want to know that your remediation efforts are not treating the symptoms), but rather the root cause(s).
Root cause analysis is a tool to help identify not only what and how an event occurred, but also why it happened. This analysis is a key element of a fraud risk management program and is now a best practice or hallmark of an organizations compliance program. When able to determine why an event or failure occurred, it is then possible to recommend workable corrective measures that deter future fraud events of the type observed. It is important that those conducting the root cause analysis are thinking critically by asking the right questions (sometimes probing), applying the proper level of skepticism, and when appropriate examining the information (evidence) from multiple perspectives.
This program is designed to introduce the common methods used for conducting root cause analysis and to develop an understanding of how to identify root causes (not just causal factors) using proven techniques. In addition, we will demonstrate how to initiate a root cause analysis incident exercise and work with senior management, legal, compliance, and internal audit on an appropriate resolution. We also introduce the “spheres” acting around the “meta model of fraud” and how to use those “spheres” in the root cause process. Finally, this program will present the “three lines of defense”, which provides the audit committee and senior management with a better understanding where the break downs occurred.
How can we protect our brand? What are we doing to protect our brand? Questions all board members should be constantly asking. Reputational risks can damage the most well-crafted business strategies and is a growing challenge that companies around the world are still learning how to manage.
By definition, reputational risk refers to the potential for negative publicity, public perception, or uncontrollable events to adversely impact a company’s reputation, thereby affecting its revenue.
Board directors covet their company’s reputation because it’s their most valuable asset. A study by Deloitte and Forbes affirmed this conviction, but should not surprise anyone. Senior-level executives also agreed that their company’s reputation presented the greatest risk to the company’s ability to achieve business strategies.
The Red Flag Group recently conducted a survey, which asked business decision makers 20 questions to determine the importance of protecting reputation. Highlights of the survey questions include:
The biggest perceived threats vs. the biggest actual threats
The relationship between reputational risk and legal risk
Risk-related attitudes of external stakeholders (consumers, investors and the media)
The relationship between risk ownership and risk mitigation
I have highlighted some of the results below. I encourage you to read the entire survey.
Highlights of Survey
According to the survey, the majority believe that legal and reputational risks are of approximately the same importance.
When looking at the survey results, the most commonly flagged and biggest reputational risks were identified as follows:
What’s also interesting is the survey revealed that a current employee’s actions cause the most harm to reputation. Alternatively, the threat is from within.
As previously mentioned, current employees present the highest risk to the company’s reputation.
However, it is interesting that third parties such as distributors, suppliers and former employees are ranked so low given recent headlines about data breaches caused by suppliers handling data of large, international companies. Similarly, if we look at the top five risks previously identified as potentially impacting the company’s reputation, we find that these are some areas that typically involve the use of third parties to perpetrate the misconduct:
Data security breaches
Antitrust and competition
While companies are typically faced with the actions of their own employees for these risk areas, many of the risks above involve a high degree of interactions with outside third parties such as distributors, service providers and vendors. In this sense, the identified problematic groups, perceived top risks and recent examples of reputational risk failures aren’t in congruence. Although it can be more practical to control the existing workforce at a company, there needs to be a focus on external parties who also pose a risk to the company’s reputation..
The strategy of mitigating risks often falls on the shoulders of the department(s) or individuals who own the risks. Based upon the survey responses, the legal and compliance functions are often identified as owning or providing oversight for some of these risks. This is a slippery slope, because the business or management should own the risks – not legal or compliance!
We have been battling this same issue with internal audit over the years, so let’s set the record straight.
Internal Audit’s (3rd Line of Defense) objective is essentially to provide independent assurance that risk management, governance and internal control processes are operating effectively.
The Compliance function (2nd Line of Defense) is there to reasonably ensure that the company is complying with all applicable laws, rules and regulations, as well as internal codes of conduct, policies and procedures. There objective is predominantly operational.
It is management’s job to identify the risks facing the organization and to understand how they will impact the delivery of objectives if they are not managed effectively. Moreover, management is responsible for establishing and maintaining internal control to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations.
Data Analytics Can Help Boards Understand
Many boards fear that the lack of control over reputational risk makes it impractical or improbable to manage these risks. Managing reputational risk requires managing internal and external stakeholders such as customers, employees, vendors; however mitigating reputational risk is a challenging and worthwhile endeavor as this creates and preserves value for any organization. Boards must acquire and utilize the right set of tools to measure, monitor and analyze reputational risk. The use of data analytics, if done properly, is a powerful tool that can help identify and quantify market and media response and in some instances unveil new risks that have been hidden or lurking in plain sight. For example, an uptick in negative social media posts could signify the emergence of a risk such as a possible product recall, negative customer experience, or other risk that could negatively impact the company’s reputation or possibly the reputation of a competitor, which could lead to new opportunities.
Some Keys to Managing Reputation Risk
Include reputation risk as part of the overall risk management strategy
Ensure your enterprise risk assessment proactively identifies, prioritizes and manages key risks – don’t boil the ocean
Ensure policies, procedures, and controls are in place and operating effectively
Train employees and external parties appropriately
Understand your stakeholders expectations
Communicate prioritized risks and risk management strategies effectively
Have a crisis management plan in place and conduct regular simulations or “red ball drills” to properly prepare for the occurrence of a risk event.
Reputation risk is real, which means companies should continue to improve their capabilities for managing this risk. Leading organizations already treat reputation risk as a strategic risk, which is an accelerating trend and a tactic that leads to the creation and preservation of value.
An effective approach to managing reputation risk requires a sustained effort — before, during, and after a crisis. Reputation risk management does not have a start or end date!
Baker Tilly provides services to help manage reputational risk. Our data analytics capabilities, cultural surveys, and crisis management advisory services provide the tools and strategies to help organizations manage this risk.
I welcome your thoughts and comments, but know that Baker Tilly can help!
Compiling a list of thought leaders in ethics and compliance is fun, but so challenging. There are simply too many thoughtful people in this field — which is itself enormous and wide-ranging — to call out everyone worth following. So below is a small slice of the thinkers in corporate ethics and compliance that I try to follow.
How should we define a thought leader, exactly? I define it literally. First, someone whothinksabout corporate compliance issues, and puts those thoughts into words. Some bloggers and tweeters, for example, do a superb job passing alongwhathappened, but notwhyorhowit happened.
Second, thought leaderslead.They raise questions about what should or could happen in ethics and compliance, even if practical obstacles today make achieving those goals difficult right now. Thought leaders provide context around the events of today to suggest what might be possible tomorrow.
Compliance Thought Leaders You Should Be Following
Without further delay (and in no particular order), here are a handful who fit that description.
Hui Chen, the former Justice Department compliance counsel who left that role in 2017. Since then Chen has been a consultant and prolific thinker about how compliance programs should work.For example, Chen often says a modern compliance function should have data analysts, auditors, and organizational behavior experts, rather than a fleet of lawyers. Does that make logical sense? Yes. Is it the case in most companies, with budgets of maybe $1 million tops? No. Butshouldcompliance officers ponder how to achieve that by, say, 2025, given the way business risk are evolving? Absolutely.
Kristy Grant-Hart, a former compliance officer now hanging her own shingle at Spark Compliance Consulting, who gives great career advice for compliance officers. Grant-Hart has written three books on how to succeed both in your job and in your career — and all of her advice hinges upon time management, building alliances, considering new options. Over the long course of a career, that’s much more valuable wisdom than news of the latest FCPA enforcement action.
John Reed Stark, the Securities and Exchange Commission’s first cybersecurity enforcement specialist in the 1990s, who now runs his own consulting firm on all things cybersecurity and compliance. He writes and talks often about incident response plans, disclosing cybersecurity risks, regulatory enforcement around cybersecurity issues, and the like. Even when you disagree with his analysis (as I sometimes do), Stark always makes you think.
Cydney Posner, special counsel at the Cooley law firm and author of the firm’sCooley PubCo blog. Posner does a great job watching corporate governance and securities issues: everything from reform of proxy advisory firms to climate change disclosure, to trends in SOX compliance reporting. Her posts can sometimes run long, but they are worth it. The “Sidebar” posts within larger posts are worth your time, too.
Jonathan T. Marks, a partner in the global forensic investigations and compliance practice at Baker Tilly and superb thinker on issues around fraud, internal control, and financial reporting. Let’s be honest: most compliance officers are lawyers, so they know the law and investigations; but few are auditors, and even fewer understand the forensics involved in tracing financial misconduct through bogus invoices, shoddy corporate payment systems, poor whistleblower hotlines, and they like. Marks, who is not a lawyer,doesmake those connections. He shares his thoughts on his own blog,BoardAndFraud.com, several times a week.
Tom Fox, long-time FCPA commentator and author of theFCPA Compliance & Ethics Report blog. Honestly, however, these days Fox churns out more content, on more issues, through theCompliance Podcast Networkthat he runs. That’s where you can get a weekly run-down on FCPA compliance issues; discussion of good board governance practices; analysis of innovation in compliance, and more. (Disclosure: Fox and I host a “Compliance Into the Weeds” podcast weekly where we take deep dives into compliance news of the day.)
Francine McKenna, a writer for Marketwatch about financial reporting and corporate governance news, andtweeter extraordinaireon the same subjects. After a first career in auditing, McKenna began a second career in the 2000s writing about the audit industry, which eventually brought her to Marketwatch. She does an outstanding job showing exactly how corporate or regulatory moves connect to financial reporting, and vice-versa.
And while I am reluctant to place myself among such esteemed company, some people do praise my own blog atRadicalCompliance.comandmy Twitter feedas pretty thoughtful. I just think I’m very funny.
CCO’s Are True Thought Leaders
Of course, this list is by no means comprehensive. I excluded anyone from compliance vendors to avoid the appearance of playing favorites, but some astonishingly bright minds work in the vendor world. The intellectual wattage among audit firms, law firms, and consulting firms is amazing. Most firms run their own blogs; I follow those too.
What is wanted is not the will to believe, but the will to find out, which is the exact opposite.” – Bertrand Russell, “Skeptical Essays,” 1928
Questions about professional skepticism – how to define it, how much is enough, what policies support it, and what practices diminish it – are perennial topics of concern among auditors and accountants. These topics also should be of concern to all stakeholders, including a company’s management, board of directors, and audit committee.
In any discussion of fraud detection and prevention, the phrase “trust but verify” is almost certain to come up. Regardless of how apt that concept might have been in the context of Cold War diplomacy, it could be argued that “trust but verify” is actually bad advice when it comes to deterring fraud in general.
In fact, “trust but verify” could be a downright dangerous approach when applied to audit procedures in particular. A much better slogan for fraud deterrence would be, “Trust is a professional hazard.”
Skepticism: It’s Everyone’s Job
Recently, the necessity of professional skepticism has been emphasized repeatedly. For example, in August 2013, Jeanette M. Franzel, board member of the PublicCompany Accounting Oversight Board (PCAOB), said, “Our inspection results all too often show that substantial progress is needed in order to more consistently achieve the appropriate application of professional skepticism throughout the audit process and across audits. Additional efforts are needed to better understand how the framework of professional skepticism applies across varying audit situations.”
Months earlier, the PCAOB issued a staff audit practice alert on the topic, which included this cautionary note: “Observations from the PCAOB’s oversight activities continue to raise concerns about whether auditors consistently and diligently apply professional skepticism. Certain circumstances can impede the appropriate application of professional skepticism and allow unconscious biases to prevail, including incentives and pressures resulting from certain conditions inherent in the audit environment, scheduling and workload demands, or an inappropriate level of confidence or trust in management. Audit firms and individual auditors should be alert for these impediments and take appropriate measures to assure that professional skepticism is applied appropriately throughout all audits performed under PCAOB standards.”
It is not just auditors who must be concerned with maintaining appropriate professional skepticism. This point was stressed during a roundtable convened in April 2013 by the Anti-Fraud Collaboration, which comprises the Center for Audit Quality (CAQ), FinancialExecutives International (FEI), The Institute of Internal Auditors (IIA), and the NationalAssociation of Corporate Directors (NACD). The author participated in this program, which had the objective of bringing together some key players – corporate directors, financial executives, external auditors, and internal auditors – from all along the financial reporting supply chain to discuss each group’s expectations and understanding of the various players’ roles in deterring and detecting financial reporting fraud.
Boards, particularly audit committee members, must take care to exercise a skeptical approach to financial reports and supporting information.
A portion of the discussion focused on an initial survey of the four organizations’ members, which produced a number of surprising findings about the attitudes and opinions of the various stakeholders. The roundtable’s summary concluded, “A large majority of survey respondents believe that financial management has primary responsibility in deterring financial reporting fraud, with a smaller majority believing financial management is responsible for detecting financial statement reporting fraud.”
The implication is that because financial management plays a leading role in detecting financial fraud, it is incumbent on executives – not just auditors – to exercise appropriate levels of professional skepticism. Board members and particularly audit committee members also must take care to exercise a skeptical approach to financial reports and supporting information.
Tellingly, 42 percent of the internal auditors said that their organization exhibits more trust than skepticism. This is a particularly troubling admission considering the paramount role that professional skepticism – not trust – must play in auditors’ performance of duties.The Anti-Fraud Collaboration’s survey also revealed that the various stakeholders’ expectations and opinions about their organizations’ effectiveness in deterring and detecting fraud vary widely. When asked to rate his or her organization’s overall performance, an internal auditor was much less likely to say that his or her organization exhibits the appropriate balance between trust and skepticism. As shown in Exhibit 1, only 46 percent of those affiliated with the IIA said that their organization exhibits the appropriate balance of trust versus skepticism, compared to 58 percent of the financial executives (members of FEI), 70 percent of the external auditors (CAQ members), and 79 percent of the board members (affiliates of NACD) who responded.
Defining the Issue
An obvious early step in helping executives, boards, and auditors decide the appropriate balance between trust and skepticism in their organizations is to come to a general agreement on what professional skepticism really means. The auditing profession, as one might expect, has devoted considerable effort to defining the term.
The IIA, representing the internal audit profession with approximately 180,000 members worldwide, defines professional skepticism as “the state of mind in which internal auditors take nothing for granted; they continuously question what they hear and see and critically assess audit evidence.” PCAOB standards define professional skepticism as “an attitude that includes a questioning mind and a critical assessment of audit evidence.” It requires an emphasis on the importance of maintaining the proper state of mind throughout the audit.
Over the past 10 years, researchers have developed a theoretical model that views professional skepticism as a function of six fundamental characteristics, including a recognition that individuals might have different perceptions of the same information.
Defining skepticism and identifying its primary traits have also been the subjects of considerable academic and professional research in recent years. In November 2013, the Standards Working Group of the Global Public Policy Committee (GPPC), a consortium of large accounting firms, published a research paper on the topic. The publication, “Enhancing Auditor Professional Skepticism,” was written by professors Steven M. Glover and Douglas F. Prawitt of Brigham Young University. The paper’s stated purpose was to develop “a shared understanding of what professional skepticism is, how it should be applied, the threats to professional skepticism and the safeguards that may be cost effective.”
The authors noted at the outset that “the term ‘professional skepticism’ is widely used but may mean different things to different organizations and individuals.” The writers went on to suggest that “to move the dialogue on improving the consistent appropriate application of professional skepticism forward, it is important that a shared understanding be developed regarding what professional skepticism is, how it should be applied and documented in various situations, and how threats to professional skepticism manifest themselves at different structural levels.”
The GPPC research, like many other efforts, draws partly from academic work by Kathy Hurtt, Martha Eining, and R. David Plumlee. In a series of papers over the past 10 years, these researchers developed a theoretical model that views professional skepticism as a function of six fundamental characteristics:
A questioning mind: Not accepting information at face value but instead looking for evidence or proof to justify the information
Suspension of judgment: A propensity to withhold acceptance or rejection until all information has been found and considered
A search for knowledge: As evidenced by genuine curiosity and enjoyment of learning
Interpersonal understanding: Recognizing that individuals might have different perceptions of the same information
Self-confidence: Valuing one’s own insights and being willing to challenge the assumptions of others
Self-determination: The personal initiative to take action based on the evidence
This multidimensional view and a related 30-question survey the authors developed to provide an empirical measure of individual auditors’ relative skepticism have formed the basis of much of the academic research on professional skepticism over the past decade. This view also provides a useful explanation of characteristics and behavior that can be inherently difficult to measure objectively.
Ninety-four percent of board members were confident or highly confident that they exercise sufficient skepticism
An objective of all this research on professional skepticism is to help identify factors that prevent or discourage auditors – and others in the financial reporting supply chain – from developing and maintaining the appropriate level of skepticism. One of the most prevalent factors is simple complacency – as demonstrated by another response to the Anti-Fraud Collaboration’s survey.
As shown in Exhibit 2, survey respondents were asked to assess their confidence that the various groups responsible for deterring and detecting fraud in their organization were exercising a sufficient level of skepticism.
Of all the groups, board members (NACD members) were most complacent about the performance of responsible parties in their organization. They were almost unanimous (98 percent) in expressing confidence that their company’s internal and external auditors exercise sufficient skepticism. Ninety-four percent of board members were confident or highly confident that they exercise sufficient skepticism themselves.
On the other hand, external auditors (CAQ members) were much less confident in others’ performance. Only 73 percent of the CAQ’s respondents were confident or highly confident that financial executives exercise sufficient skepticism of financial results. External auditors viewed board members and audit committees almost identically to executives.
Internal auditors (IIA members) had roughly the same view of financial executives and even less confidence that board members and audit committees demonstrate appropriate skepticism in reviewing financial information. In other words, the views of internal and external auditors differ significantly from the views of executives and board members.
Other Impediments to Appropriate Skepticism
Complacency is only one attitude that could cause an executive, board member, or auditor to exercise insufficient skepticism when considering financial information. The GPPC’s research paper points out several natural tendencies that can lead to faulty judgment or weakened skepticism:
Overconfidence. Decision-makers must be careful not to overestimate their abilities and understanding of issues. Overconfidence can lead them to challenge statements, assumptions, and procedures insufficiently.
Confirmation bias. It’s natural to give more weight to information that confirms our opinions. This inclination can bias a wide variety of auditor judgments and cause executives and board members to see what they expect to see.
Anchoring. Anchoring is the tendency to start with initial values and data that are familiar. An auditor can be influenced inappropriately by the previous year’s account details, for example.
Availability. Information that is easily accessible (or available from memory) is often considered less relevant to a decision than information from alternative sources. As a result, auditors unconsciously might not apply the most relevant information to the audit.
In addition to personal biases, other challenges can inhibit skepticism. For example, an external auditor’s conflicts of interest and less-than-thorough understanding of the business are areas of legitimate concern.
One of the most significant challenges is deadline pressure. An auditor is naturally under substantial pressure to complete the work and issue the report promptly. A cunning fraudster can take advantage of the situation by initially diverting the auditor’s time and attention to areas that are unlikely to raise concerns and saving problematic areas until the engagement’s end, when time is short. Recognizing and resisting this tactic requires the application of professional skepticism – not only on the part of the external auditor but by the others involved in the process as well.
Beyond Audit: What Other Stakeholders Can Do
Although the GPPC’s research focused on auditors, the same observations – and the same potential weaknesses – apply to everyone in an organization who has the responsibility to detect or deter fraud, from executives with financial reporting responsibilities to the board of directors in general and members of the audit committee in particular. Ultimately, all these individuals have a direct interest in detecting fraud or misstatement and a responsibility to be on guard against complacency or other impediments.
The GPPC study’s authors noted, “While auditors can and must do better in their central role, we believe that a complete solution to the problem of enhancing auditor professional skepticism requires an approach that addresses threats at all structural levels and that involves all of the key stakeholders that share responsibility in enhancing the reliability of the financial reporting process.”
It is essential for all organizations to encourage clear, open communication among all parties concerned. The Anti-Fraud Collaboration’s report noted, “For the roles to operate well together, communication is critical.” The authors went on to advocate “open and candid conversation among the internal and external audit functions, financial management, and the audit committee, allowing for audit committees to perform their governance role with necessary transparency and realistic expectations.”
Beyond this general effort, all stakeholders can take a number of specific steps to encourage appropriate levels of professional skepticism, including the following –
Self-criticize each significant judgment. Make it a point to play the role of the independent reviewer or inspector, particularly of your own A professional skeptic continuously challenges his or her beliefs and belief-based risk assessments. Critical self-assessment is necessary to demonstrate to others why and how beliefs and assessments are justified.
Make an effort to resist complacency and other natural tendencies such as confirmation bias. Question whether you are placing undue weight on prior risk assessments or discounting evidence inconsistent with your with your expectations.
Be alert to Pressure. Pay particular attention to pressure to truncate risk assessment procedures or make unwarranted assumptions to beat time constraints. This step is especially important as deadlines approach.
Understand the sources of evidence. Identify and assess audit risks from multiple perspectives, using multiple sources of evidence,
Be aware of the relative reliability of various types of evidence. In general, documentation from internally generated documents – particularly those that are generated manually or not linked to other reporting systems – is less reliable as evidence than documents generated by external sources such as banks or suppliers. See graphic below.
If, as asserted at the outset, trust is indeed a professional hazard for auditors, then it follows that informed, knowledgeable skepticism is a professional asset. That principle applies not only to auditors but also to the board members and financial executives responsible for detecting and deterring fraud of all types, specifically financial reporting fraud. By challenging their own assumptions – and creating an environment in which such challenges are encouraged and supported – companies will not just deter fraud but make its detection more likely.
After what appears to be a 73 month investigation, as part of an internal administrative order, Juniper Networks, Inc. – NYSE: JNPR (“Juniper”, or “the Company”) will pay $11.7 million as part of a settlement with the Securities and Exchange Commission (“SEC”); however, in an 8-K filed on February 9, 2018, Juniper disclosed that the Department of Justice (“DOJ”) had completed its investigation and, citing Juniper’s cooperation, decided to take no further action against the company – no criminal charges. Apparently the DOJ had sent the letter closing its investigation in the fourth quarter of 2017.
The SEC settlement is broken down as follows: $6.5 million civil penalty; $4 million in disgorgement—representing the amount of profit the company made as a result of the conduct; and, about $1.2 million in interest.
From 2008 to 2013, sales employees in Russia agreed to increase discounts on sales made by third-party partners, according to the settlement. The discounts were funneled into an off-book funds or referred to as “common funds” (in the fraud space called “slush funds”) which were directed partially by Company sales representatives and used to pay for customer trips, including travel for foreign officials to various locations where there were no Juniper facilities or industry conferences related to Juniper’s business – the trips had little to no business purpose.
The trips “were predominantly leisure in nature and had little to no educational or business purpose.” That would include trips to places where there were no Juniper facilities, nor any industry conferences related to Juniper’s line of work.
During a similar period, sales employees at the Company’s Chinese subsidiaries paid for excessive travel and entertainment of customers, including foreign officials. Certain local marketing employees falsified trip agendas to understate the amount of entertainment offered on the trips. These sales employees submitted the falsified and misleading trip agendas to Juniper’s Legal Department to obtain event approval, apparently subsequent to the event taking place and without adequate review.
Juniper learned of the “common funds,” which were against corporate policy, in late 2009. However, diverting funds and using them to pay travel expenses continued through 2013.
The crux of this matter focuses on Juniper’s overseas subsidiaries who appear to have exploited weak oversight of accounting policy and the apparent override of weak internal controls to create “off book “common fund accounts” or slush funds used to pay bribes.
The SEC’s order states the bribery happened from 2008 to 2013. Juniper’s subsidiary in Russia, JNN Development Corp., worked with local partners in that country to increase discounts those partners would supposedly offer to customers — except, of course, those discounts never actually reached Juniper’s customers. Instead, the local partners diverted that money into a slush fund to cover travel and marketing expenses for customers, including foreign government officials. Those customers received free trips which, to use the SEC’s words, “were predominantly leisure in nature and had little to no educational or business purpose.” That would include trips to places where there were no Juniper facilities, nor any industry conferences related to Juniper’s line of work.
At least some of these trips were directed by JNN executives, which is not surprising. More disturbing is that Company executives allegedly knew about this behavior as early as 2009, and told JNN stop — but the funneling of monies into the “common funds” and the improper trips continued into 2013.
Meanwhile, from 2009 through 2013, roughly the same four years, sales employees at Juniper’s Chinese subsidiaries were busy falsifying trip and meeting agendas for customer events in an attempt to conceal the real value of entertainment involved on the trips. Apparently, falsified agendas were submitted to Juniper’s legal department for approval. Against Juniper’s travel policies, the legal department approved numerous trips without adequate review and after the events had taken place.
Key Best Practices
Fraud detection and prevention is not a hobby. Ensure you have the proper skills on your team!
Check your allegation triage process and escalation protocols.
Conduct risk based ethics and compliance training.
Revisit your risk assessment continuously, not a prescribed periods. Remember achieving strategy equals risk management, plus, effective internal controls!
Russia and China are inherently high-risk countries and markets for bribery.
Ensure Fraud controls are properly designed to deter, detect, or prevent unethical behavior or worse fraud.
Discounts and rebates have historically been a source of consternation by many organizations. Ensure procedures are designed to test both the design and effectiveness of the controls surrounding any discount or rebate program. \
Monitor customer sales activities for suspicious activity-follow the money!
Revisit your policies and procedures and determined if they address pertinent issues, such as what constitutes acceptable behavior by employees.Ensure your internal audit plan is truly risk based.
Assess the skills of internal audit. If there is a deficiency in skills related to fraud and FCPA, strongly consider augmenting your internal audit team with outside professionals who can “tuck in” and provide those skills.
Review your third-party risk management program.
Have your compliance program reviewed at a minimum every three (3) years by a outside independent professionals to ensure that it is not stale.
Seek to understand communication protocols and the escalation process-
Review the allegation log frequently, but no less than every 60 days, to ensure investigations are being done timely. Question investigations that have stopped or have lingered on beyond 60 days;
Ensure the board (audit committee) is being briefed timely on all serious matters by the chief audit executive and chief compliance officer; and,
Question the discipline applied to the bad actors and whether the risk assessment, compliance and ethics training, and monitoring protocols need to be modified.
Challenge your Chief Compliance Officer to provide evidence of the existence of a strong ethics and compliance program
In Juniper they never mention what if any discipline was applied to those that ignored the “cease and desist”. In addition, they also don’t mention internal audit, which seems odd.
Cooperation and Remediation
According to the SEC, Juniper cooperated by disclosing facts in a timely way and “voluntarily produced and translated documents” to the agency during the investigation. They also “provided the [SEC] staff presentations regarding its investigation.”
As part of its remedial action, Juniper instituted a compliance preview and required pre-approval of non-standard discounts. It also now requires pre-approval for third-party gifts, travel, and entertainment, channel partner marketing expenses, and some operating expenses in high-risk markets.
Governance, risk, and compliance are no joke – get in the game!
Having an appropriate compliance structure that collaborates and works in harmony with internal audit and the legal function is a must to ensure risks are handled appropriately.
We just confirmed our first awesome speaker Niki A. den Nieuwenboer, Assistant Professor of Organizational Behavior and Business Ethics at The University of Kansas School of Business.
You all should know that leadership matters in fostering ethical conduct at work. However, the focus is often on top level managers and their “tone at the top.” The role of middle managers has remained somewhat of a mystery until now.
Niki den Nieuwenboer will lead a robust and enlightening discussion on her recent study that examined a case where middle managers, in response to upper management pressures, coerced front-line employees to deceive upper management about their performance.
She plans on spotlighting the creative role that middle managers played in finding ways to cheat, and discuss implications for ethics management and fraud prevention.
Stay tuned for more announcements about the symposium line-up and registration information as we round out the day!