THE RISKS OF FRAUD ARE GREATER THAN EVER
Of course, Madoff, was able to pull off his swindle with low tech computers, a tiny audit firm, a JP Morgan Chase bank account, and the complicity of certain JPMC employees. Could it happen again? With technology becoming increasingly intertwined with all organizational functions, Weber believes the opportunities for wrongdoing have increased exponentially in recent years. One way is through general ledger entries, which previously required the generation of manual ticket that created both an audit trail and a witness. With automation, Weber observes, a change could theoretically be made remotely without manual documentation.
The potential threats from technology are far more than an academic exercise. Circumventing internal controls was also at the heart of the 2012 Libor scandal. Traditionally, securities firms conducted surveillance and required supervision by archiving recorded phone conversations and emails. To get around this, according to Weber, the Libor fraudsters simply re-routed their communication to texts and instant messaging, with the latter requiring the archiving feature to be manually turned on. Weber notes that all the trading desk phone recordings in the world would not curtail this type of conduct in the digital age. In short, compliance officers must factor rapid changes in technology into any businesses’ risk assessment.
The Libor example also illustrates the risk of unintended consequences with technology. “You have firms where IT people were installing upgrades and they were doing it for the right reasons, to increase automation and productivity,” Weber laments. “This is an example of how you can be brainstorming Section 404 and the worst that can happen and no one in that session would contemplate that instant messaging is going to sink us today. That’s the way that technology has changed compliance. There are little hidden baubles or gifts in every upgrade or every business process.”
THE CHICKEN OR THE EGG: CULTURE OR SYSTEM?
Before taking Weber’s EMBA course on fraud, Jacqueline Manger had poured substantial resources into her compliance systems to combat worst case scenarios at the investment advisory firm she operates. In fact, she treats compliance as a value proposition. She boasts self-regulatory processes that are more robust, in her opinion, than firms that are 5-10 larger than hers. Manger admits that her approach requires more paperwork, but adds that she can supply “every piece of paper the SEC needs within 24-48 hours,” which can give her the benefit of the doubt in a dispute.
That said, Weber’s course took her appreciation for creating a compliance mindset to another level. “When I think about fraud prevention and control, if you’re going to set up a program, inspire your organization to prevent internal fraud and promote compliance culture regardless of your regulatory structure.” Manger also doesn’t buy that compliance is the exclusive purview of just the legal and finance departments either. She suggests rotating different departments through compliance or creating compliance ambassadors in each department. “Having people who are not exactly what you think of involved in compliance is also very helpful as a check.”
Nora Cobo, an online MBA student and executive with a nonprofit organization, came away with a similar impression after taking Weber’s class. “Fraud has potential to pervade everything,” she warns. “It is very easy to get wrapped up in the nobility of what you do, but you need to be vigilant regardless of what field you are in or how large or small your organization is.” However, Manger views such vigilance as a meager bulwark against human nature. “If you have a narcissistic person coming in to be a bad actor, you can have the best compliance culture and I’m not so sure you can really stop those truly evil people from doing what they want to do.”
Luckily, Manger doesn’t see too many people like that. “It is surprising to me everyday that there are not more Madoffs, to tell you the truth,” she concedes. “What it tells me is that the super majority of people in my industry who manage assets and pooled investments and have complete discretion are good players, not bad actors.”