Hidden Agendas: Investigating Conflicts of Interest

October 2010

IN THIS ISSUE

— Friends, Love and Loyalty: When Officers Have Conflicts
— Identifying Motivators of Conflict of Interest Fraud
— In the next issue

GREETINGS!

Welcome to the October 2010 edition of our newsletter! In this issue, we’ll look at investigating conflicts of interest. including some unusual ways in which an officer or director of a company might have a conflict.

FRIENDS, LOVE AND LOYALTY: WHEN OFFICERS HAVE CONFLICTS

Since at least the post-Watergate political environment of the 1970s, the term “conflict of interest” has entered the American lexicon, and its meaning has evolved into something far beyond the political realm. Stories of government officials or corporate officers placing their own enrichment above their duty to their employers also make for great headlines, underscoring a populist “us versus them” angle for news media outlets. But for every high-profile case (think Darlene Druyun of the U.S. Air Force helping Boeing secure a contract then obtaining various perks from the company), there are dozens of unreported – and often simply undiscovered – instances of such breaches of conduct. How do you spot it, and how can you stop it?

The first signs that a vendor or consultant may have undue sway with an officer in your organization would be seen by looking at accounts payable activity. Did that vendor have a sudden surge in activity which could not be easily explained by a change in policies? was one particular official responsible within your organization for negotiating such contracts and purchases, or were those duties segregated? If the duties were split among many people, what was the nature of their relationships, if any, outside the workplace? Performing this sort of records review and conducting interviews will help identify who did what when — then you can move on to why.

IDENTIFYING MOTIVATORS OF CONFLICT OF INTEREST FRAUD

As with most frauds, the single greatest motivator in conflict of interest fraud is some measure of financial incentive — some times, this can intermingle will vendor fraud, where a purchasing manager sets up a dummy company to “sell” a company goods or services of nominal value, or which may not even exist. In this case, cross-checking vendor addresses with those of employees can often ferret out the culprits of the scheme and help establish a fact pattern. But typically conflict of interest frauds have a more complex nature: take, for instance, a case we investigated regarding various members of a well-known non-profit group, who also served together on the board of an unrelated, publicly-traded for-profit company. When the chairman of the for-profit company joined the non-profit’s board (the other two non-profit officers were directors on the for-profit company’s board), the for-profit company quickly became the second-highest paid independent contractor to the non-profit, grossing more than $5 million in sales. Previously, it had not been listed within the top five.

Conflicts can also exist among an officer’s shareholdings, either regarding his personal investments or, particularly in the case of well-compensated senior executives, concerning a charitable organization or family trust. Assembling a time line of insider trading filings or non-profit stock purchases (often reported in schedules attached to Form 990 tax-exempt organization filings) and comparing to your company’s history of transactions can help determine whether an officer had the company’s interests at heart when endorsing a course of action, or whether they were looking to help themselves even if the deal hurt the company’s broader interest and shareholder value.

IN THE NEXT ISSUE

In the November issue, as the TARP program officially expires, we’ll look at the efforts made to root out fraud among participants, and look at what remains to be done.