BUSINESS ETHICS:
How to Protect You and Your Organization
Sheila Moran, CPA, CFE
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BUSINESS ETHICS –
How to Protect You and Your Organization
• Reasons to Promote an Ethical Work
Culture
• What an Ethical Work Culture Looks Like
• How to Promote an Ethical Work Culture
2
Reasons to Promote an Ethical Work
Culture
3
REASONS TO PROMOTE
BUSINESS ETHICS
• Safeguard Assets from Occupational
Fraud
• Laws and Regulations
• Reputational Risk
• Return on Investment
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Safeguard Assets
• The typical organization loses
5% of annual revenue to fraud.
• Applying this percentage to the
2013 estimated Gross World
Product would result in a
projected total global fraud
loss of more than $3.7 trillion.
Source: ACFE 2014 RTTN
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Safeguard Assets – Cost of
Fraud
• For a fraud that amounted to $3 million
– Investigation, accounting, and legal fees could
cost $400,000
– Recovery may only be $600,000
-Excerpt adapted from
Michael J. Comer, Corporate Fraud
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REASONS TO PROMOTE
BUSINESS ETHICS
• Safeguard Assets from Occupational
Fraud
• Laws and Regulations
• Reputational Risk
• Return on Investment
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Laws and Regulations
• Foreign Corrupt Practices Act (FCPA)
• Federal Sentencing Guidelines
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Foreign Corrupt Practices Act
(FCPA)
• FCPA Basics:
– Don’t bribe foreign officials
– Keep accurate records and have adequate
controls
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Foreign Corrupt Practices Act
(FCPA)
•“Hewlett-Packard subsidiaries:
– created a slush fund for bribe payments,
– set up an intricate web of shell companies and
bank accounts to launder money,
– employed two sets of books to track bribe
recipients, and
– used anonymous e-mail accounts and prepaid
mobile telephones to arrange covert meetings to
hand over bags of cash,”
-Deputy Assistant Attorney General Bruce Swartz
Source:bloomberg.com.news/2014-04-09
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Foreign Corrupt Practices Act
(FCPA)
• Hewlett-Packard –
– Subsidiaries in three countries made improper
payments to government officials to obtain or
retain lucrative public contracts.
– H-P agreed to pay $108 million in fines.
– April 9, 2014
Source: www.sec.gov
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Foreign Corrupt Practices Act
(FCPA)
“If you have an effective, robust compliance program, you
ought to be finding violations if you are doing business
globally.”
Mark Mendolsohn
Former Deputy Chief
Fraud Section, U.S. Dept. of Justice
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Foreign Corrupt Practices Act
(FCPA)
• Ralph Lauren Corporation –
– Subsidiary of Company paid bribes paid to
government officials in Argentina from 2005 to
2009.
– Company will disgorge more than $700,000 in
illicit profits and interest
– SEC Announces Non-Prosecution Agreement
With Ralph Lauren Corporation Involving
FCPA Misconduct
– April 22, 2014
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Foreign Corrupt Practices Act
(FCPA)
• Ralph Lauren Corporation –
– The SEC took into account the significant remedial
measures undertaken by Ralph Lauren Corporation,
including a comprehensive new compliance program
throughout its operations.
– "When they found a problem, Ralph Lauren
Corporation did the right thing by immediately
reporting it to the SEC and providing exceptional
assistance in our investigation," said George S.
Canellos, Acting Director of the SEC's Division of
Enforcement.
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Foreign Corrupt Practices Act
(FCPA)
“The number of individual prosecutions has
risen—and that’s not an accident. That is quite
intentional on the part of the Department. It is
our view that to have a credible deterrent effect,
people have to go to jail. People have to be
prosecuted where appropriate. This is a
federal crime. This is not fun and games.”
Mark Mendolsohn
Former Deputy Chief
Fraud Section, U.S. Dept. of Justice
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Laws and Regulations
• Foreign Corrupt Practices Act (FCPA)
• Federal Sentencing Guidelines
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Federal Sentencing Guidelines
• Sentencing Guidelines play a significant role in
sentencing of white-collar crime
• Common types of white-collar crime subject to federal
courts:
– Embezzlement
– Mail fraud, wire fraud, Internet fraud
– Bank fraud, money laundering
– Mortgage fraud, real estate fraud
– Securities violations
– Government contract fraud
– Tax fraud
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Federal Sentencing Guidelines
• Guidelines establish base fines, intended
to ensure uniformity and objectivity in
sentencing
• Minimum sentencing can be:
– Reduced by as much as 95%
– Increased by as much as 400%
• Guidelines suggest that the court can take
into account the existence and
effectiveness of a compliance program
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REASONS TO PROMOTE
BUSINESS ETHICS
• Safeguard Assets from Occupational
Fraud
• Laws and Regulations
• Reputational Risk
• Return on Investment
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Reputational Risk–
Audit Committee Investigations
• AgFeed – March 11, 2014:
– SEC investigated Audit Committee chairman for
“his role in covering up what they say was a
massive accounting fraud at a now-bankrupt
animal feed company.”
– The SEC said U.S. managers and directors
"engaged in a scheme to avoid or delay
disclosure of the fraud.“
– "This is a reminder that audit committees must
follow up on red flags and seek outside counsel
for assistance"
Source: Reuters.com/article/2014/03/11
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Reputational Risk–
Audit Committee Investigations
• InfoGroup:
– SEC investigated Audit Committee chairman
for conducting an insufficient investigation.
– Audit Committee chairman accepted plea
agreement that included a $50,000 fine and a
restriction against serving as an officer or
director for five years.
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REASONS TO PROMOTE
BUSINESS ETHICS
•
•
•
•
Safeguard Assets from Occupational Fraud
Laws and Regulations
Reputational Risk
Return on Investment
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Return on Investment–
Cost of Financial Statement Fraud
• Announcement of fraud led to 16.7 percent
decrease in stock price in the surrounding two
days
COSO Report—Fraudulent Financial Reporting: 1998–2007,
An Analysis of U.S. Public Companies
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Return on Investment–
Humboldt Creamery
• Ex-CEO deceived the auditors to secure an
extension of an existing loan :
– Allegedly stacked packaged milk powder
– Provided false financial information and
supporting documents
• Top valuation of $100 million
• Sold at auction for $19.25 million
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Return on Investment Corporate Culture
Source: Ethisphere Institute (http://ethisphere.com/wme2011/)
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REASONS TO PROMOTE
BUSINESS ETHICS
•
•
•
•
Safeguard Assets from Occupational Fraud
Laws and Regulations
Reputational Risk
Return on Investment
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The Need for an Ethical
Corporate Culture
• An ethical work culture serves as the
foundation for preventing, detecting, and
deterring fraudulent and criminal acts
• Consistent efforts create an environment
in which making the right decision is
implicit
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BUSINESS ETHICS –
How to Protect You and Your Organization
• Reasons to Promote an Ethical Work
Culture
• What an Ethical Work Culture Looks
Like
• How to Promote an Ethical Work Culture
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What Does an Ethical Work Culture
Look Like?
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What Does a Strong Corporate
Culture Look Like?
• Tone at the Top
• Hallmarks of an Ethical Work Culture
• Naughty and Nice List
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What Does a Strong Corporate
Culture Look Like?
• More than just a checklist of initiatives
• Even companies with sound policies in
place can have culture of corruption
• Observed by outcome rather than by any
individual component
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Tone at the Top
• Strong ethical culture starts with tone at
the top
– Set a good example, lead by example
• Limit extravagant expenses
– Engender open communications, candor
• Avoid groupthink—e.g., Chamberlain’s WW2 War
Office
– Address anger or complaints
• Build loyalty
• Reduce resentment that feeds rationalization
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Tone at the Top - DHB
Industries
• Lavish spending by founder and former CEO
– Bentley, Ferrari
– $90,000 for son’s bar mitzvah
– Use of company Learjet to fly family on
$400,000 worth of flights to Caribbean, Italy,
France
– $101,000 for an armored car for his family
– $144,000 on video iPods and digital cameras
given as gifts at daughter’s bat mitzvah
– $101,000 jewel-studded belt buckle
Source: Bloomberg
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Tone at the Top - DHB
Industries
SEC charged three ex-directors of DHB Industries:
•For “their lack of oversight [that] allowed senior
management to manipulate results, and to funnel millions of
dollars to DHB’s founder and chief executive.”
•Being “willfully blind to numerous red flags” of fraud.
-Chicago Tribune
2/28/11
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DHB Industries – SEC Press
Release
“We will not second-guess the good-faith efforts of
directors. But in stark contrast…these directors and
audit committee members … repeatedly turned a blind
eye to warning signs of fraud and other misconduct by
company officers."
Robert Khuzami
Director
SEC’s Division of Enforcement
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What Does a Strong Corporate
Culture Look Like?
• Tone at the Top
• Hallmarks of an Ethical Work Culture
• Naughty and Nice List
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What Does a Strong Corporate Culture
Look Like?
• Cult-like cultures
– Fervently held ideology
– Indoctrination
– Tightness of fight, enforcement of fit
– Elitism, pride
Jim Collins and Jerry Porras, Built to Last
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What Does a Strong Corporate
Culture Look Like?
• Hallmarks of cult-like cultures
– Orientation and ongoing training programs
– Internal “universities” and training centers
– On-the-job socialization by peers and immediate
supervisors
– Rigorous up-through-the-ranks policies:
• Hiring young
• Promoting from within
Jim Collins and Jerry Porras, Built to Last
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What Does a Strong Corporate
Culture Look Like?
• Hallmarks of cult-like cultures (continued):
– Unique language—Disney “cast members”
– Corporate songs—Wal-Mart staff meeting cheers
– Tight screening process—Google numerous
interviews
– Buy-in mechanisms—stock options, bonus pool
– Constant verbal and written emphasis on corporate
values
Jim Collins and Jerry Porras, Built to Last
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What Does a Strong Corporate
Culture Look Like?
• Tone at the Top
• Hallmarks of an Ethical Work Culture
• Naughty and Nice List
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Corporate Culture: Naughty and
Nice List
• Cult-like cultures: Wal-Mart
Now, I want you to raise your right hand—and remember
what we say at Wal-Mart, that a promise we make is a
promise we keep—and I want you to repeat after me:
From this day forward, I solemnly promise and declare
that every time a customer comes within ten feet of me, I
will smile, look him in the eye, and greet him. So help
me Sam.
–Sam Walton
Jim Collins and Jerry Porras, Built to Last
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Corporate Culture: Naughty and
Nice List
• Cult-like cultures: IBM
IBM is really good at motivating its people; I see that
through Anne. [She] might be brainwashed by some
people’s standards, but it’s a good brainwashing. They
really do instill a loyalty and a drive to work.
–Spouse of an IBM employee, 1985
Jim Collins and Jerry Porras, Built to Last
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Corporate Culture: Naughty and
Nice List
• Cult-like cultures: Nordstrom
Welcome to Nordstrom
We’re glad to have you with our Company.
Our number one goal is to provide outstanding customer service.
Set both your personal and professional goals high.
We have great confidence in your ability to achieve them.
Nordstrom Rules:
Rule #1: Use your good judgment in all situations.
There will be no additional rules.
Jim Collins and Jerry Porras, Built to Last
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Corporate Culture: Naughty and
Nice List
"At Microsoft, the way we work is as important as the
products we create and the services we provide. We expect
our employees to do the right thing every single day - and
hold ourselves to the standards our customers expect."
-Dan Bross
Senior Director of Corporate Citizenship
Microsoft Corporation
WME: 2011-2013
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Corporate Culture: Naughty and
Nice List
The threshold for ethical behavior has justifiably risen over
the past decade, which makes this recognition especially
meaningful. This award belongs to all of our employees
and our executive team, who collectively set and exceed
the behavioral standards for our business.
– Stephen A. Roell
Chairman and CEO
Johnson Controls
WME: 2008-2013
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Corporate Culture: Naughty and
Nice List
“By making ethics a completely transparent dialogue, Best
Buy can be a leader in ethical standards for our employees,
our customers, and our shareholders. Please feel free to
join the conversation.”
-Kathleen Edmond, Best Buy’s Chief Ethics Officer
WME: 2009-2012
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Corporate Culture: Naughty and Nice List
Chat Room: Best Buy
•A Best Buy store employee:
– Entered a friend’s RewardZone information when ringing
up other customers’ purchase transactions.
– Proper procedure is to enter the address and phone
number of the store itself.
–The employee’s friend received RewardZone certificates.
–The terminated employee felt that he was treated unfairly
and requested a Peer Review.
(Source: http://www.kathleenedmond.com/2010/03/09/employee-terminated-for-defraudingrewardzone-program/)
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Corporate Culture: Naughty and Nice List
Chat Room: Best Buy
• Chat Room Discussion Questions:
– The terminated employee did not appear to fully
understand the wrongdoing in his actions.
• Is ignorance a legitimate defense in cases of ethical
misconduct? Why or why not?
– The fraud amounted to less than $40.
• Was the amount of the fraud relevant to the termination
decision? Why or why not?
– Other employees in the store were found to be doing the
same thing.
• Does that affect your view of the disciplinary action
taken? If so, how?
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Corporate Culture: Naughty and
Nice List
• Hewlett-Packard
– The H-P Way—Bill and Dave
•
•
•
•
•
Performance bonuses
Employees shares
Ground-level decision making
Tuition support
Family accommodations—attending Little League
games
– Then….Carly Fiorina, Patricia Dunn and Mark
Hurd
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Corporate Culture: Naughty and
Nice List
• Hewlett-Packard
– Subtle change in culture — Carly Fiorina
• Viewed H-P Way as an excuse not to innovate
• Made herself less accessible
– Led to more concrete moral violations:
• Patricia Dunn—Quit in 2006 after accusations of using
a PI to obtain phone records of a board member and
journalist
• Mark Hurd—falsified expense records to conceal a
relationship with a contractor
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Corporate Culture: Naughty and
Nice List
• Facebook’s Mark Zuckerberg:
– Allegedly hacked into Harvard's computer
network to copy ID photos.
– Allegedly hacked into the personal e-mail
accounts of school newspaper editor covering
Zuckerberg’s legal dispute with a rival social
network, which resulted in a $65 million
settlement.
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Corporate Culture: Naughty and
Nice List
Mark Zuckerberg on 60 Minutes
- “Hack”
- Mark’s personal page
Facebook's Beacon
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What Does a Strong Corporate
Culture Look Like?
• Tone at the Top
• Hallmarks of an Ethical Work Culture
• Naughty and Nice List
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BUSINESS ETHICS –
How to Protect You and Your Organization
• Reasons to Promote an Ethical Work
Culture
• What an Ethical Work Culture Looks Like
• How to Promote an Ethical Work
Culture
54
How Can You Promote an Ethical Work
Culture?
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How To Promote an Ethical
Work Culture
• Draft Ethics Policy
• Provide Ethics Training
• Address Fraud Triangle
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Ethics and Compliance Tools
Source: ACFE 2014 Report to the Nations
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Ethics Policy
• For an ethics policy to be effective, it
should:
– Use clear, simple language
– Be easily accessible for quick reference
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Ethics Policy Development
• Reflect on Organization’s Purpose and Core
Values:
– Who are we?
– What do we do?
– Why do we do it?
– Who do we serve?
– How can we do it better?
• Coordinate With Process Improvement Efforts
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Ethics Policy
• An ethics policy provides a framework for ethical
behavior in an organization. It should:
– Set forth the organization’s purpose and core values
– Define a standard of conduct
– Discuss penalties for violations
• Docked pay
• Termination
• Demotion, reassignment
– Explain how to report violations
• Include an anti-retaliation policy
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Customizing Ethics Policy
• Ethics policies can be customized based
on:
– Level of responsibility
– Relationship to organization
• Vendors, supply chain
• Subsidiaries…FCPA enforcement
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Department of Perpetrator
Source: ACFE 2014 RTTN
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Ethics Policy – Level of
Responsibility
• Managers and executives may require
specialized training based on their
positions of authority.
• Examples:
– Purchasing manager should be trained to
identify kickbacks.
– Controllers should understand disbursement
fraud schemes.
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Customizing Ethics Policy
• Ethics policies can be customized based
on:
– Level of responsibility
– Relationship to organization
• Subsidiaries…FCPA enforcement
• Vendors, supply chain
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Customized Ethics Policy Vendors
Example: Cisco Systems has a code of
conduct for its vendors.
http://www.cisco.com/legal/Cisco_Supplier_
Code_of_Conduct.pdf
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How To Promote an Ethical
Work Culture
• Draft Ethics Policy
• Provide Ethics Training
• Address Fraud Triangle
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How To Report Fraud: Hotlines
Source:
www.es.northropgrumman.com
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Ethics Policy
Source: www.nadsp.org
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Ethics Policy
Source: www.autoinc.org
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Ethics Policy
Source:
www.select2gether.com
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Ethics Policy
Source: www.sasw.org.sg
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Situational Ethics Checklist
• What written rules govern my behavior?
• What are the possible consequences of
my choices?
• Could I justify this action to my family?
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Situational Ethics
•Would a reasonable person question your
involvement with that project?
•How would your actions be interpreted on
the evening news?
As a Connecticut state employee, you have
been placed in a position of trust and are
held to a high standard of ethical conduct.
(Source: www.ct.gov)
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How To Promote an Ethical
Work Culture
• Draft Ethics Policy
• Provide Ethics Training
• Address Fraud Triangle
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Address the Fraud Triangle
Pressure
Perceived
Opportunity
Rationalization
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Address the Fraud Triangle
• Reduce Perceived Opportunities
• Address Rationalizations for Fraud
• Minimize Employee Pressures
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Address the Fraud Triangle
• Factors influencing Rationalization and
Perceived Opportunity:
– Integrity and skill set of decision-makers involved
in estimating financial statement values
– (Un)willingness of management to post significant
adjustments or adverse disclosures
– Tolerance for ethical violations in the past
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Assess the Culture –
Take Home Question
• Can you think of any performance goals
set for a division or unit manager in your
organization that might promote an
incentive to commit fraud?
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Address the Fraud Triangle
• Reduce Perceived Opportunities
• Address Rationalizations for Fraud
• Minimize Employee Pressures
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Ethics and Compliance Tools
Source: ACFE 2014 Report to the Nations
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Ethics and Compliance Tools
Source: ACFE 2014 Report to the Nations
81
How To Promote an Ethical
Work Culture
• Draft Ethics Policy
• Provide Ethics Training
• Address Fraud Triangle
82
BUSINESS ETHICS –
How to Protect You and Your Organization
• Reasons to Promote an Ethical Work
Culture
• What an Ethical Work Culture Looks Like
• How to Promote an Ethical Work Culture
83
BUSINESS ETHICS –
How to Protect You and Your Organization
Questions?
Sheila Moran
E-mail: fraudrx@gmail.com
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