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Corporate Fraud Prevention

Examining Corporate Gifts and Entertainment

Scott Langlinais | March 22, 2019

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Employee gift

Gifts and favors are commonly exchanged between people involved in a business relationship. To many on the receiving end, it is considered a common courtesy and a perk. But somewhere there is a line where a gift corrupts the relationship and potentially harms your organization.

Imagine yourself a leader of an organization with a certain amount of purchasing power, and your direct reports have the authority to request and procure products and services. Many of your folks have established relationships with vendors, which your people believe allow your organization to get the best possible deal. Naturally, the vendors take your people out to lunch, invite them to events, offer tickets to sporting events and the theatre, and the like.

Below is a natural progression of gifts commonly provided by vendors to customers—in any industry. Where would you draw the line at acceptable versus unacceptable behavior? Forget about your gift policy—let's talk reality. I'm assuming one vendor representative and one of your employees.

Where would you draw the line for behavior you would expect from your own subordinates?

  • Lunch ($15)
  • With a couple of drinks (+$30)
  • And a couple of tickets to the ballgame or theater (+$100)
  • In a suite (+$500)
  • In another city (+$1,000)
  • Accompanied by prostitutes (+$10,000)
  • And a 10 percent commission on each purchase payable to a company your employee controls on the side (?!?)

Now think about your own relationships with third parties. Where would you draw the line of acceptable behavior for you?

Finally, if you were to remove the guesswork, what do you think is really happening among your employees and your vendors? Where is that line?

The Power of Gifts and Entertainment

In Influence: The Psychology of Persuasion, psychologist Dr. Robert Cialdini discusses the "Rule of Reciprocation" and its power. Any gift enforces uninvited debts and can trigger unfair exchanges; the amount of the gift is irrelevant.

A terrific example involves the Hare Krishna movement, which was largely irrelevant and unnoticed until they began walking around airports offering travelers a pretty flower. A simple gift resulted in ballooning donations.

Frankly, as fraud professionals, we don't expect people to decline a free lunch. And in certain situations, you are just going to have to deal with vendors that pay bribes and kickbacks just as a normal course of business.

One of my clients is a national telecom company that procures a particular piece of network hardware manufactured by only two companies in the world. Both of those companies are known to pay bribes and kickbacks. My client says, "We need them more than they need us." Those companies pay bribes and kickbacks, which is out of their control. However, this doesn't mean their employees have to accept the briefcase full of cash.

Is it realistic to expect people not to accept a huge kickback? Depends on if that person wants to risk going to jail. Some countries are starting to issue death sentences for corrupt behavior.

Some of the worst violators of this rule are the folks writing opinions on internal control structures. Look at company names on suites at the local stadiums, and you'll find the Big Four, the four largest accounting firms in the world. They realize the power of gifts and entertainment.

What Can Go Wrong?

Often, the problem does not lay in the gift itself, but rather the behavior enabled by the cozy relationship. When an employee gets too close to a third party, people can overlook disastrous shortcuts, over-billings, the substitution of lower-quality products and services, or the placement of unqualified people on the job.

On June 20, 2018, the US Department of Transportation inspector general issued a memo announcing their planned review of the oversight of Southwest Airlines by the Federal Aviation Administration (FAA) following a fatal incident on April 17, 2018, on Southwest Airlines Flight 1380. The initial investigation suggested that the oversight of key inspections might have been corrupted by the exchange of gifts and entertainment among airline and regulatory personnel.

In another report around the same time, the Office of Inspector General identified a similar problem involving the FAA's oversight of American Airlines' flight test program. The report stated that the inspector had lost independence and objectivity due to an inappropriately close relationship with the flight test manager. When pilots filed complaints about the program, the inspector dismissed them as "problem pilots."

If cozy relationships cause people to overlook safety inspections of airplanes, where failure results in catastrophe, what problems could such relationships cause in your organization?

Where You Drew Your Lines

If we return to the exercise at the top of the article, the direction in which you moved up or down the list as you answered each question can be informative. If you allowed yourself more leeway for gifts or entertainment because "rank has its privileges" or "I'm more ethical than my subordinates," then you may be enabling corrupt relationships in your organization. Ethics cascade from the top of an organization down, they aren't built from the bottom up. One manager engaging in loose behavior can override the ethical behavior of any number of subordinates.

If the second line you drew is lower than the first, then you can be sure the third line is lower than you realize.

Strong, ethical leaders understand the need for setting the standard and may err toward stricter behavior than what they expect out of their subordinates.

Many organizations are trending toward no gifts at all. Buy your own lunch, pay for your own ticket to the game. Drawing the line at zero makes a situation binary and easy to adjudicate: did you take a gift or not? Instead of: how much was that really worth?

With regard to our own clients, we favor practical solutions that reasonable and ethical people can buy into.

One of my clients had a unique and interesting idea related to vendor gifts—one of their locations collected all of the gifts they received and had a white elephant Christmas party, so all of their personnel had a shot at each gift. No one involved knew who gave the company what.

My team doesn't favor overcontrolling any situation. We certainly don't favor form-over-substance processes that lack teeth. We expect people to use good judgment: would a reasonable person consider the behavior unacceptable?

Of course, this is not going to work for everyone; some people are going to take advantage regardless of the situation. However, sound stewardship of company assets and communication of those expectations are powerful and will have a great impact when backed up by your own example.

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