Tackling Compliance with Conviction
David Robillard
Through many years of investigating corporate malfeasance in Mexican based manufacturing companies, we have observed that firms which make integrity programs an inherent part of their cultures are far more effective at detecting and preventing fraud. In today’s post- Sarbanes-Oxley world, integrity programs have become de rigeur. Too many companies, though, consider these simply a compliance requirement, not the right or smart thing to do. A purely compliance based approach is not enough: focusing solely on rules does not motivate workers; it scares them. Integrity programs must be implemented with conviction from the executive level down.
Below are examples that illustrate how two companies approach integrity. Although both describe Mexican-based operations, the lessons apply globally.
An auto parts manufacturer, has gone beyond Sarbanes-Oxley to expand the traditional role of the audit. A Special Investigations Group reports to the CEO, who in turn chairs the Integrity Committee – composed of Directors from Administration, Audit, Human Resources, Finance, and Legal. The group is trained in a range of investigative methods, including computer forensics, investigative interviewing, and data mining, and has been building its capabilities for over ten years. To support the team’s work, the company established an integrity line through which the audit department receives all reports of misconduct. Over time, it has developed the capacity to deploy resources swiftly on a range of issues, including conflict of interest, FCPA violations, corrupt practices, discrimination, harassment, financial fraud, unsafe working conditions, and substance abuse.
The company has a seven day maximum response time to classify reports and determine the best method to proceed. Compliance-focused cultures, on the other hand, tend to get bogged down at this point, specifically in judging which reports merit investigation and which are nuisances, as well as in deploying investigative resources efficiently. Next, once allegations are proven, the company takes swift decisions in addressing guilty parties. Recently, a senior executive with more than 15 years tenure was terminated with cause, despite his strategic importance to the company. Immediately afterwards, the decision and the reasons for it were communicated to every employee. The impact was swift and reinforced a culture of integrity and accountability.
A United States-based manufacturer of medical devices, provides an example of a program that works less well. For years, Mexican manufacturing has been synonymous with maquiladoras, facilities originally created to make products with parts imported duty free. This firm operates such a plant in Mexico. A routine audit there uncovered more than $1 million waste of raw materials. Within three weeks of this report becoming known, two senior plant employees who had initiated an internal investigation – the HR Manager and the Quality Control Supervisor – were murdered. The client sought Kroll’s assistance to determine if these incidents were related. Because the company’s United States-based integrity program is not used at the local operation, our work and that of the company’s auditors was made much more difficult. In practice, the operation is disconnected from head office oversight. An integrity line exists, but employees are unaware of it. The line also has no Spanish speakers, making it useless in Mexico. Local managers maintain tight control over communications going outside the plant. Staff members fear expressing any concerns, greatly reducing their value as sources of information.
More than ever, companies need to integrate integrity programs into their corporate cultures to enable a greater flow of information from staff on misconduct. This may not make an organization bulletproof, but it will allow much swifter problem identification and decision making.
View the Manufacturing Industry Report Card
| EIU Survey |
Losses are down but concerns remain: This year’s survey indicated that the manufacturing industry had seen fraud losses decline, but also pointed to two particular areas of concern: financial mismanagement and IP theft.
Serious efforts: Some of the reduction in fraud losses is a result of the industry taking the problem seriously.
The downturn may have a silver lining: As with some other industries, however, the downturn may be raising vulnerability to fraud while making less available to steal.
Overall, manufacturing companies have made some headway with fraud, although financial mismanagement and IP theft remain significant issues. How much of this success is a result of their own efforts, and how much from the broader effects of the downturn, will only become clear in an economic recovery. Written by The Economist Intelligence Unit |
Global Fraud Report
2009/2010 Annual Edition
