theinnerauditor

By Rumbi Petrozzello, CPA/CFF, CFE
2017 Vice-President – Central Virginia Chapter ACFE

Last Thursday, the 15th of June 2017, the New York State Senate Committee on Ethics and Internal Governance met. The previous sentence reads like a big yawn with which no one, beyond perhaps the members of the committee itself, would be concerned. However, this meeting was big news. The room was packed with members of the media and every member of the committee was in attendance. Why? Because this was the first meeting the committee had empaneled since 2009, as confirmed by the committee’s published archive of events. It turns out that it was indeed a big deal that all committee members were in attendance because, for eight years straight, none of the committee members had attended a single meeting.

If you are thinking that the ethics committee did not meet for eight years because there were no ethical issues to discuss and our state’s legislative leadership practiced only ethical and upright behavior, you would be sorely mistaken. John Sampson, the State Senator who chaired the committee at that last meeting in 2009 was found guilty, of obstruction of justice and of lying to federal agents in 2015 and sentenced to jail time in January 2017. Evidently, taking their cues from the tone at the top evidenced by the leadership of their ethics committee, during the same eight-year meeting hiatus, seven other state senators were convicted on charges that included mail fraud, looting a nonprofit and bribery.

So, you might ask, what happened at the meeting last week? The committee had come together to discuss stipends, that are supposed to go to committee chairs, that were apparently also being paid to committee vice-chairs (and, in one case, to a deputy vice-chair, whatever that is). There was a motion proposed to stop making these payments to anyone but the committee chair. It seems that just coming together was more than enough work for the committee and, therefore, they tabled the motion, a motion that would not even have been binding, until its next meeting. It should be noted that two of the senators receiving this chair stipend, as vice-chairs, serve on the ethics committee and both voted to postpone voting on the motion. It would be laughable if it were a laughing matter.

Think about where you work and about all the clients with whom we work, as fraud examiners and forensic accountants. We work with our clients and with those who employ us to suggest comprehensive policies that cover good business practices and ethical behaviors and actions. Reading about the shenanigans of the State Senate Committee on Ethics recalled several thoughts:

The assumption that personnel will automatically be motivated to behave as corporate owners want is no longer valid. People are motivated more by self-interest than in the past and are likely to come from backgrounds that emphasize different priorities of duty. As a result, there is greater need than ever for clear guidance and for identifying and effectively managing threats to good governance and accountability.

Even when different employee backgrounds are not an issue, personnel can misunderstand the organization’s objectives and their own role and fiduciary duty. For example, many directors and employees at Enron evidently believed that the company’s objectives were best served by actions that brought short term profit:

—through ethical dishonesty, manipulation of energy markets or sham displays of trading floors;
—through book keeping that was illusory;
—through actions that benefited themselves at the expense of other stakeholders.

Frequently, employees are tempted to cut ethical corners, and they have done so because they believed that their top management wanted them to; they were ordered to do so; or they were encouraged to do so by misguided or manipulative incentive programs. These actions occurred although the board of directors would have preferred (sometimes with hindsight) that they had not. Personnel simply misunderstood what was expected by the board because guidance was unclear or they were led astray and did not understand that they were to report the problem for appropriate corrective action, or to whom or how.

Among our clients, lack of proper guidance or reporting mechanisms may have been the result of directors and others not understanding their duties as fiduciaries. Directors owe shareholders and regulators several duties, including obedience, loyalty, and due care. Recognition of the increasing complexity, volatility and risk inherent in modern corporate interests and operations, particularly as their scope expands to diverse groups and cultures has led to the requirement for risk identification, assessment and management systems.

• If our client businesses want to do an excellent job at implementing effective ethics programs, orientation of new employees should always involve a review of the code of ethical practice by the staff tasked with compliance and with enforcing policies. How many entities are actively practicing what they preach during such sessions? The values that a company’s directors wish to instill to motivate the beliefs and actions of its personnel need to be conveyed to provide the required guidance. Usually, such guidance takes the form of a code of conduct that states the values selected, the principles that flow from those values, and any rules that are to be followed to ensure that appropriate values are respected.
• After orientation, what steps are companies taking to maintain their ethics programs on an on-going basis? Principles are more useful to employees than just rules because principles facilitate interpretation when the precise circumstances encountered do not exactly fit the rules prescribed. A blend of principles and rules is often optimal in maintaining of a code of conduct in the long term.
• Is leadership periodically coming together to talk about where their firm stands when it comes to ethics and compliance? A code on its own may be nothing more than ‘ethical art’ that hangs on the wall but is rarely studied or followed. Experience has revealed that, to be effective, a code must be reinforced by a comprehensive ethical culture.
• Is anyone reviewing how whistleblowing claims are being dealt with? Does the company even have a whistleblower program? If so, does the staff even know about it and how it works? Whistle-blowers are part of a needed monitoring, risk management and remediation system.
• Is leadership setting a positive tone at the top and displaying the behaviors that it is demanding from employees? The ethical behavior expected must be referred to in speeches and newsletters by top management as often as they refer to their health and safety programs, or to their antipollution program or else it will be viewed as less important by employees. If personnel never or rarely hear about ethical expectations, they will perceive them as not a serious priority.

Once, I worked at a company where senior management smoked in the office; behavior that is illegal and was, on paper, not allowed. When staff members complained to human resources, no corrective action was taken. Frustrated, some staff members called the city hotline to file a report. Following visits from the city, human resources put up no smoking signs and then notices encouraging employees to keep reports of inappropriate staff smoking internal. By only paying lip service to policy, this company’s management seemed populated by future candidates for the State’s Senate Ethics Committee. But my former employer doesn’t stand alone as evidenced by frauds at Wells Fargo and at others. A company can pull out screeds of rules and regulations, but what matters most is what the staff knows and what the leadership does.

In the case of the New York State Senate Committee on Ethics and Internal Governance, what it did was delay a vote on the issues before it until the next meeting. And when will the next meeting be? After taking eight years to set up its last meeting, the committee was in no hurry to set a date for the next. They adjourned without scheduling the next one. They did, however, take a moment to congratulate themselves on attending this meeting. You can’t forget the important stuff.