Why Every Single Company Needs to Focus on Corporate Compliance
Lawrence Hartman is the author of GUILTY TILL PROVEN INNOCENT: A Shocking Inside View Into America’s Failing Justice System (now available online at Amazon) and may be contacted by email at Lawrence@ComplianceMitigation.com to discuss your legal mitigation needs.
Internal corporate fraud is an ever-growing problem. It leads to loss from both direct theft and open-ended legal exposure, including fines, legal fees and potential criminal penalties. Management is often caught unaware by employee fraud and uncertain what to do when it’s uncovered. This course is designed to (i) strongly encourage employee compliance, (ii) minimize your financial and legal exposure going forward, and (iii) ensure that you’re well prepared should the need arise.
The Crux of the Issue
§ Fraud is a problem for companies of every size, with the dollar value running into the billions of dollars. Small and large businesses each face their own unique problems in monitoring for and uncovering fraud. In small businesses it’s typically a lack of resources and management bandwidth to spot the fraud. In larger companies, it’s sheer size combined with an over-reliance on technology which can be circumvented.
§ Managers are focused on meeting targets and goals, not detecting fraud. In fact, an employee’s integrity is basically assumed once hired and/or passing a screening by human resources.
§ Yet, corporate fraud continues to be one of the government’s highest criminal priorities, according to the FBI.
§ Corporate fraud cases pursued by the FBI run the gamut, from accounting schemes designed to deceive management, investors, auditors, and analysts about the true financial condition of a company, to cases involving fraud on the government and insurers, vendors, and clients. Telemarketers, brokers and the healthcare field have been targeted particularly harshly the last several years.
§ The FBI has partnerships with numerous agencies to capitalize on their experience in specific areas such as securities, taxes, pensions, energy, and commodities. The Bureau has placed greater emphasis on investigating allegations of these frauds by working closely with the SEC, CFTC, Financial Industry Regulatory Authority, Internal Revenue Service, Department of Labor, Federal Energy Regulatory Commission, and the U.S. Postal Inspection Service, further expanding its broad reach.
§ The Department of Homeland Security has its own independent mandate to criminally pursue fraud, financial crimes involving blackmail, contract fraud, grant fraud, immigration fraud and program theft. Similar authority is also delineated to the Secret Service and Postal Inspectors so that on numerous occasions there are multiple agencies involved in any given investigation.
The Value Proposition
§ The purpose of initiating a compliance program is to protect your business, which can make it feel like an expensive cost and hassle. The reality, however, is that most effective compliance programs end up paying for themselves through elimination of waste, fraud, abuse, discrimination, and other practices that disrupt operations and put your company at risk.
§ An effective program improves communication between leadership and staff, including a process for creating, updating, distributing, and tracking compliance policies. After all, employees can’t be held responsible for rules and regulations they don’t know exist.
§ Once they understand expectations, staff can more readily stay focused on the organization’s broader goals, ensuring the operation runs smoothly. What’s more, when employees are properly trained on compliance requirements, they are more likely to recognize and report illegal or unethical activity.
§ Maintaining compliance equips employees to do their jobs well, reach career goals, and keep customers happy, helping the company grow and achieve its goals.
§ By incorporating a comprehensive compliance program, everyone in the company becomes a stakeholder in the process with a vested interest in ensuring the overall integrity of the organization, regardless of title or position.
§ A well-integrated compliance program enhances a company’s reputation, making it easier to gain additional business and be counted on as a reliable partner.
§ Compliance can serve as a driver of change. While most people think the purpose of compliance is to rein in conduct, it’s actually engraining an ethical code of conduct and corporate values which can profoundly influence organizational behavior over time.
§ Compliance helps to ensure consistency. Those same corporate values enable everyone in the company to adhere to the same standards, adapting them to situationally dependent circumstances.
§ Compliance therefore also reduces unforced errors, knowing that everyone is following the same script.
§ Finally, in the unfortunate event that your organization faces a lawsuit, your corporate compliance program will also help in court. An organization that has made a robust, good-faith effort to prevent and detect violations of the law by its employees and agents will be treated less harshly than one that was indifferent to complying with the law.
Case Studies
A. Graff Pinkert — A Small Private Company
§ Graff-Pinkert’s accountant, Kellie Kelly, stole more than $100,000 from the company by writing counterfeit checks to herself in a blatant case of internal fraud.
§ Kelly would present checks that were payable to vendors to her boss.
§ Once she secured his signature, she would then place the checks back in her typewriter and erase the vendor’s name using the typewriter’s erase key and then either writing in her own name or writing them as payable to cash.
§ Kelly’s embezzlement by writing counterfeit checks took place over a period of four years.
§ When the family-owned business finally discovered the thefts, she had forged more than 270 of them.
§ The owner called the FBI. Kelly pleaded guilty to mail fraud and was sentenced to two years in prison in addition to being ordered to repay the company restitution.
B. Enron — A Large Public Company
§ Throughout the late 1990s, Enron was one of the country’s most innovative companies. It had its roots in building power plants and operating gas lines, but became better known for buying and selling gas and electricity futures, and creating new markets for such oddball “commodities” as broadcast time for advertisers, weather futures, and Internet bandwidth.
§ Its annual revenues rose from about $9 billion in 1995 to over $100 billion in 2000 making it the 7th largest company in America. At the end of 2001, however, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud.
§ The collapse of Enron, which held more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the United States.
§ Enron’s troubles stemmed from dubious accounting practices (including creating off balance sheet entities), primarily orchestrated by the company’s CFO Andrew Fastow.
§ These practices were undertaken in order to meet financial targets and sustain continued appreciation of the company’s stock price.
§ The scheme began to fall apart when an Enron VP wrote an anonymous letter to the company’s Founder and CEO Ken Lay suggesting that the prior CEO Jeff Skilling had left the company because of accounting improprieties and other illegal actions.
§ Enron’s CFO, Andrew Fastow, was behind the complex network of partnerships and many other questionable practices. He was charged with 78 counts of fraud, conspiracy, and money laundering. Fastow accepted a plea agreement in January 2004. After pleading guilty to two counts of conspiracy, he was given a 10-year prison sentence and ordered to pay $23.8 million in exchange for testifying against other Enron executives.
§ On May 25, 2006, a jury in a Houston, Texas federal court found both Skilling and Lay guilty. Jeff Skilling was convicted of 19 counts of conspiracy, fraud, insider trading and making false statements. Ken Lay was convicted of six counts of conspiracy and fraud. In a separate trial, Lay was also found guilty on four counts of bank fraud. Kenneth Lay died of a heart attack on July 5, 2006, and a federal judge ruled that his conviction was void because he died before he had a chance to appeal. On October 23, 2006, Skilling was sentenced to 24 years in prison.
§ The government’s investigation lasted four years and resulted in criminal charges against thirty-three individuals.
§ The downfall of Enron, moreover, impacted thousands of investors, including many employees who had their life savings tied into Enron’s stock.
§ Most industry professionals acknowledge that many of Enron’s problems stem from an extreme lack of planning and compliance within the organization.
