Is your organization immune from fraud?
The 2019 Annual Fraud Conference recently held at the University of Texas at Dallas gave practical steps to assure you are. The conference was an outstanding success and I was honored to have been part of it once again.
The conference attendees; internal auditors, CPA’s, faculty and students, learned firsthand how to detect and stop fraud from occurring during all-day workshops the first day. Nathan Mueller, a former accountant for a multinational insurance firm taught one of the workshops, and my friend and Bank Whistleblowers United colleague William ( Bill) K. Black and I taught another.
Over a four-year period, Mr. Mueller embezzled $8.45 million from his former company. He discussed how fraud is hidden, told of how the fraud was eventually detected and gave specific examples that could have prevented his fraud from ever occurring.
Bill Black, the Keating Five whistleblower who was largely responsible for the resignation of speaker of the house Jim Wright in the 1990s and who developed the concept of control fraud, alerted the attendees on what to look for in preventing control fraud. Control fraud exists when a trusted person in a high responsibility position or entity subverts the organization and engages in fraud for personal gain.
Bill referenced the extensive research and publications of Nobel Laureates, George Akerlof and Paul Romer and their work on control fraud. He pointed out how destructive control fraud is and how prevalent it was during the 1980’s saving and loans crisis.
We noted the parallels to the 2008 financial crisis and used Citigroup as an example of how highly compensated management was by the very profitable business model of buying and selling mortgages that were defective and so most likely to default.
I addressed the Kellogg business case written about one of my chief underwriters at Citigroup, Sherry Hunt, who blew the whistle on the still ongoing fraud at Citigroup four years after I had been released of my responsibilities. Audience members were given a copy of the case, which we reviewed in detail about the cover-ups and why management refused to take action on my continual warnings. Once again an example of control fraud.
We talked about how to instill a business environment that prides itself on having an ethical culture and how to understand and practice ethical values. In these organizations, there is no exception. Following ethical values is the expectation.
In ethical organizations employees at all levels are encouraged to give feedback and report on any misconduct they see. Transparency is the norm. We pointed out that when reporting on misconduct was low or ignored, employee satisfaction was low as well.
And we referenced the 2018 Global Business Ethics Survey (GBES), which stated that when employees are encouraged to base decision making on organizational values and standards, favorable ethics outcomes increased by 11X; when employees felt that their supervisors would hold them accountable for wrongdoing, favorable ethics outcomes increased 12X; and when employees felt encouraged to speak up even with bad news, favorable ethics outcomes increased by 14X.
Without question, the results absolutely confirm what I and others who speak for and consult with companies about the necessity of establishing an ethical culture have known and advocate: ethical behaviors pay off – for the better.
Just posting ethical values and slogans on the company’s walls or mandating ethics training doesn’t work. It’s a path that has to be followed with top management leading the way. How can fraud be prevented… by instilling an absolute adherence to ethics as the only way we do things around here, from the top down.
I was reminded of Bill’s comment at the Bank Whistleblowers United first press conference in Washington, DC in 2016 where we announced our intention to call on presidential candidates to refuse to accept campaign donations from Wall Street banks and pledge to end Wall Street corruption.
During the conference, Bill had summarized our initiative’s goals and added, “We use the f-word a lot, the five-letter word, ‘fraud,’ that you are supposed to be able to say in polite company … we need to control fraud and those who loot the company for their own personal enrichment…You don’t get pervasive fraud unless people in the company turn a blind eye … Our system of checks and balances is a fake. We live in an era of massive corruption.”
Our job at that conference was to remind everyone that corruption and fraud can be prevented if everyone in the company is brave enough to call it when they see it.
Better yet is to instill a sense of ethics throughout the organization that is a way of life- so prevention isn’t necessary. Doing so we can establish a system of checks and balances that are real and stick.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
