Conflicts of Interest

Transcription

1 1 Conflicts of Interest

2 Conflicts of Interest What is a conflict of interest? Personal actions or interests that may interfere with the Company s interests or may interfere with an employee s ability to perform his or her work objectively and effectively.

3 Conflicts of Interest, cont. Actual conflicts of interest Potential conflicts of interest Apparent conflicts of interest

4 Conflicts of Interest, cont. What kinds of situations constitute a conflict of interest? Outside employment/directorship Business interests that conflict with the Company s interests Transactions with related parties

5 Conflicts of Interest, cont. Outside Work Corporate Opportunities Disclosing Actual or Potential Conflicts

6 Harmful Conflicts of Interest: Intentional acts committed to secure unlawful or unfair gains. Payroll fraud Misrepresentation Investment fraud Insider trading Market manipulation Bribery Kickbacks Check fraud Examples of Harmful Conflicts of Interest Claims fraud Improper commissions False expense claims Wrongful disclosure of confidential information to outside parties Procurement fraud Improper payment schemes Extortion Destruction/removal/concealment of property Authorizing/receiving compensation for goods not received or services not performed Misappropriation of company assets Embezzlement 6

7 Some Common Myths A conflict of interest is usually a victimless crime. It is not it affects individuals, organizations, communities and society as a whole. Businesses can afford it. Harmful conflicts of interest leading to theft, fraud, or embezzlement are often seen as just costs of doing business. The effect of harmful conflicts of interest upon the business, its suppliers, employees and customers is largely unrecognized. (Enron, WorldCom) Victims of harmful conflicts of interest only lose money. Victims can lose much more than money. It can lead to health problems, suicide, depression and the disintegration of the family through divorce or estrangement. Corporate victimization may lead to loss of customers and public confidence in their products, reputational damage, and even bankruptcy. The vulnerable are more likely to become victims. Anyone can become the victim. 7

8 Potential Risks Insider dealing Related-party transactions Accounts misstatement (Fictitious revenues; timing differences; improper asset valuations; concealed liabilities and expenses; improper expenses) Owners/ Managers Stakeholders /Creditors Competitors IP theft Employee bribery Short shipments Theft False refunds Credit card fraud Bad checks Advance fees Customers/ third party Company Short shipment Double billing False invoices Employee bribery Vendors/ Suppliers Insurers Employees Expense account padding Embezzlement Theft of assets Fictitious customers, suppliers, consultants Kickbacks False loss claims 8

9 Harmful Conflict of Interest Environments The following factors provide fertile ground for harmful conflicts of interest: Lack of awareness by management of the organization's risk factors Inadequate control activities for identified risks Inadequate organizational structures, policies and procedures Insufficient emphasis on, and understanding of, ethical duties throughout the organization Insufficient knowledge of the warning signs Ineffective mechanisms for reporting, investigating and remediating potentially harmful conflicts of interest Inadequate employment screening practices Weak or non-existent monitoring of programs and controls 9

10 Potential Conflict of Interest Indicators Complex organizational structure (e.g., remote management or operations) Key managers or employees having too much control or authority without oversight or audit by another person Lack of clarity in the delegation of financial authority/levels of approval Managers or employees with external business interests Managers or employees with long-established relationships with contractors Poor accounting procedures: Failure to reconcile goods received with invoices/delivery notes Internal audits that are weak or non-existent Financial results and ratios that do not correlate Missing statements or unrecognized transactions Rising costs with no explanation Rapid increase in sales or change in product mix High management and staff turnover, especially in financial and accounting departments Employees subject of complaints 10

11 Red Flags Customer complaints Delays in posting customer payments Generic invoices (lack of detail) Unusual employee work habits Mysterious burglaries Close vendor relationships Weak Due Diligence Unknown vendors No third-party sign-off for vendor selection Missing documentation Excessive billing errors Decreasing payments on accounts receivable Routinely late expense/advance report submittals Inventory shortage Excessive write-offs Duplicate payments History of fraud in the company 11

12 Look for... Cash-only transactions Poorly reconciled cash expenses No (or poorly kept) asset registers Overly-complicated tasks and/or transactions requiring special skills Procedural manuals are lacking or not complied with Problems in the recruitment of staff Poor management of IT privileges; access to applications. Poor off-boarding procedures. Poor control over official stationery, check books, stamps, etc.; insufficient secure storage of confidential documents Poor accounting and approval procedures for overtime Single vendors (sole source suppliers) Vendor names/addresses that match (or are similar to) employees Many invoices from a vendor that fall just below the authorization limit Fictitious employees on the payroll Poor security culture and awareness ( acceptable levels of crime) Low morale 12

13 Some Specific Examples Employees Collusion between Purchasing Managers and Accountants to create and pay false vendors False checks created and presented Personal drinks and food submitted as customer entertainment on expense accounts Threats made that a driver would lose his job if he didn t pay money (e.g., $500 USD) Bank draft rerouted to employee s account Scrap being sold and proceeds credited to employee s own account T&E card used for personal gain (e.g., fuel card for personal vehicle expenses) Falsification of delivery notes and theft of chemicals Disposal of cars/boats inadequate records, unknown disbursement of funds Building materials no reconciliation and over-purchases are delivered to home Residential leases for fellow employees houses (while they still live there) Third-party involvement Employee demanding payments from contractors Vendor collusion charging for meals in a staff house that were never taken Tampering with measuring gauges to reduce quantities of product delivered, then billing full amount Unnecessary vehicle maintenance Employee using his position to pass business to a competitor for which he gets paid Senior manager arranging for company vehicles to be procured through a relative s company Payments made to HR rep or manager to secure or retain employment 13

14 Office Behavior/Demeanor Employee behaviors to look for: Consistently works late; reluctant to take vacations Seems disgruntled or under permanent stress Marked personality changes Unexplained or excessive time off; never takes time off Refuses promotions Overly protective or secretive about work/projects Evasive behavior fails to provide adequate explanations A nomadic history of short-term employment Forgets building badge and borrows others Use of fellow employees computers Excessive interest in financial authorization and documentation, unrelated to their position High dollar expense reports (may cover several months) and limited receipts Sudden changes in lifestyle; unexplained wealth or living beyond apparent means 14

15 10 Ways to Minimize Harmful Conflicts of Interest 1. Expect it. The potential for conflicts of interest cannot be eliminated, only managed. 2. Assess risk. Establish regular detection procedures. Conduct regular control gap analysis. 3. Segregate duties in critical areas. No one should be able to initiate and complete a transaction without involving someone else. 4. Make approvals meaningful. 5. Review and enforce password security. Inappropriate system access makes it possible to steal large amounts of money. 6. Test your internal controls. 15 Controls break down when personnel and other circumstances change.

16 10 Ways to Minimize Harmful Conflicts of Interest 7. Look for it in the organization. Target payroll, accounts payable, facilities, expenses and inventory (i.e. new laptop requests). 8. Conduct pre-employment screening. More than 20% of CVs contain false statements. Go beyond merely checking references. 9. Screen and monitor vendors. Are they who they say they are? Determine what security and fraud prevention policies they have in place. Who introduced them? Make sure there is independent sign-off. 10. Develop and communicate hotlines and consequences. Maintain an effective reporting hotline. Enforce a zero-tolerance policy for violations. Publicize actions against violators. 16

17 Entertainment, Gifts & Gratuities (EGG) Companies should want to be the market leader and outperform their competition fairly and honestly as an ethical leader: Business entertainment and gifts are intended to create good will and create positive working relationships, not to gain unfair advantage with customers. Gifts or entertainment should not be offered, given, or accepted by an employee, an employee s family member or someone representing an employee (agent) unless it: is not a cash gift is consistent with customary business practices is not excessive in value cannot be construed as a bribe or payoff does not violate any laws or regulations does not violate the Company s EGG Policy 17

18 Access to Documents & Compliance Requests erequest: 18