The Similarities That No One Wants to Mention
Procurement fraud and basketball recruiting may be in two completely different arenas, but there are crossovers between them that would surprise you. The reward vs. the risk of the choices made can alter everything.
College basketball has been in the headlines lately — for all the wrong reasons. Louisville, Auburn, Oklahoma State, the University of Southern California, Arizona, and Miami are getting publicity their chancellors, boards of directors and alumni never wanted.
The initial fallout from the basketball recruiting scandal? Six major universities and a coach or athletic director from each are immediately tarnished, possibly forever. As this investigation rolls out and expands to others, the game has changed — for basketball, college sports, and the leadership at the top and their boards, who can no longer proclaim they had no idea this could or was happening at their organizations.
Their defenders ask whether these are really criminal acts. After all, the NCAA is supposed to be the protector of honesty, integrity and professionalism (i.e., reputational risk) for prominent universities. Maybe this truthfully is a black swan event that no one could have imagined.
Others point out that despite protestations of innocence, many of the coaches (leaders) involved are hardly as pure as driven snow, and have had prior (sometimes multiple) violations. But when the FBI gets involved with all its powers, including subpoenas and threat of prosecution and jail time, risk and reward change dramatically.
Just as in business, athletic directors and their boards of directors make coaching decisions by balancing reward and risk. Potential rewards of better athletic results and enormous increases in bottom-line cashflow can seem worth the minimal risk of front-line leaders (read coaches) being caught. But sooner or later, they always do get caught.
Now Turn the Bright Spotlight Onto Business
How does the exciting world of sports and athletics even compare to the murky, dull-sounding procurement aspects of a business supply chain?
Just as for college athletics, the costs of fraud to business are high — with estimated losses averaging 5 percent of a company’s revenues for all categories of fraud, according to the 2016 ACFE (Association of Certified Fraud Examiners) Report to the Nations on Occupational Fraud and Abuse. Bribery laws in other countries are becoming ever tougher, and financial exposures are determined without regard to the country in which the fraud occurs. But with people so focused on foreign corrupt practices, have we forgotten the fundamentals of major potential fraud in areas like procurement?
In most cases, procurement fraud takes place in the organizational procurement process, not in the financial area that most consultancies audit. Consider the simple test below to evaluate your level of procurement-fraud exposure. On a scale of 1 to 10, where 1 is “Completely unsure of the answer,” and 10 is “You absolutely have this under control,” how do you rate your organization with respect to each of the following statements?
- Audit processes have procurement fraud well under control and minimized.
- All aspects of major procurement fraud risk are documented, identified and defined. These risks are reviewed and updated periodically and separately from the annual risk assessment.
- Organizational internal and external auditors have deep (a) strategic, (b) financial, and/or operational expertise to support their focus in their work for you.
- The minimum/maximum estimate of potential organizational fraud is thoroughly documented and regularly updated.
- Reputational risk from procurement fraud for your organization and senior leadership is minimal.
After totaling your points, consider your rank below:
41 to 50 – Ongoing diligence and vigilance make a good combination. Congratulations!
31 to 40 – Life is good — until it isn’t. Fraud risk in some areas still needs to be identified and mitigated.
21 to 30 – You didn’t get here overnight, and you won’t get out overnight. It’s going to take some work to reduce your procurement fraud risk.
11 to 20 – You may only be investing the minimum. More resources and attention are needed to avoid costly losses from procurement fraud.
1 to 10 – Train wrecks happen every day. Your risk of being in one is high if you don’t immediately begin to build a strong system to identify and prevent potential procurement fraud.
Foundational wisdom says that the first step to recovery or improvement is to admit you have a problem. To simplify this strategic overview of your personal and corporate risk exposure, change the categories above into the letter grades of A, B, C, D and F — which we received in school — and use D and F as failing.
- What letter grade does your business receive?
- What grade do you want?
- Where can you quickly and reasonably start the path to recovery?
Shining the Spotlight on the Personal Arena
Estimate your personal and business risk exposure by considering the total cost of fraud determined well after the fact, second-guessing your decisions and results. Total:
- Actual hard and soft costs of damages from those frauds.
- Reputational risk from front-page exposure, considering the many ways media makes leaders look unethical and sleazy when bribery, theft or failure to protect stockholder and customer interests occur.
- Plaintiffs’ bar lawsuits alleging everything imaginable, with triple damages to teach bad people like you a lesson.
- Potential attention from some fair-minded politician, who finds a way to bring criminal charges well after the fact and uses the standards of behavior in effect five years from now, which few of us can even imagine today.
Your self-assessed total guesstimate of exposure is ____________. How scary is this back-of-the-napkin total?
For those admitting they may have a problem, the next step can be as simple as looking at your lowest score on the five-question quiz and creating a path to solve the risk area it spotlights.
Want some insights from others who have lived through making changes to reduce these types of exposures? Stay tuned for part two of this article, where you can learn what attendees (who commented on the items above) shared at the recent 2017 NACD (National Association of Corporate Directors) Global Board Leaders’ Summit.
Attendees provided this information, generously and anonymously, to help companies navigate from where they are today to a more desirable and less risky place. Stay tuned for some best practices to protect your organization from potential fraud and reputational damage.
Gary W. Patterson, president & CEO of FiscalDoctor®, works with leaders who want to uncover their blind spot; before it finds them, so that they can make better decisions. He can also help increase profitability, providing access to 100 best-of-the-best experts who are often better and cheaper than incumbents. 
