Ed. Note-today we continue our ‘Tales from the Crypt” series, which is penned by a couple of anonymous compliance practitioners who will write about some of the real world experiences that they have encountered. I hope that you will not only enjoy but find useful in addressing some compliance and ethics issues that you may face in your job.

Tough Cookie 1 has spent the more than half of her 20+ legal career working in the Integrity and Compliance field, and has been the architect of award-winning and effective ethics and compliance programs at both publicly traded and privately held companies.  Tough Cookie 2 is a Certified Internal Auditor and CPA who has faced ethical and compliance challenges in a variety of industries and geographies and recently led a global internal audit team. Our series “Tales from the Crypt: Tough Choices for Tough Cookies” are drawn largely from real life experiences on the front line of working in Integrity & Compliance, and personal details have been scrubbed to protect, well, you know, just about everyone… 

Do As You’re Told

Rule # 2 in the integrity and compliance field is that “Management Override is alive and kicking,” and all you worker bees better “do what the boss says” or else. Of course, those of us senior level professionals see it for what it really is – “Management Override” is the world’s oldest risk and is the Achilles ’ Heel of Fraud Prevention due to its cycle of dysfunction:

1. Economic conditions cloak poor management decisions;
2. Staff competency is suppressed in favor of “executive decision-making;” and
3. “At will” employment rules rescue dysfunctional managers from accountability.

Even the strongest corporate or personal codes of ethics oftentimes cannot penetrate this bubble of deception without the backing of  strong, courageous leadership and a rock solid culture of integrity.

On her first day on the job for a small,  privately-held freight trucking company (The Company), the controller was invited to a meeting between the owners of the Company and their bankers.  Surprise!  The Company had been planning to factor their accounts receivable as a cash flow stop gap and meetings with the bankers were well on the way to closing the arrangement.  While factoring can be a savvy way to tighten the cash flow cycle, it is not a panacea for businesses that do not have strong cash management.  The invitation for “Management Override” to come calling was firmly in the Company’s grasp. As the days and weeks went on, the controller realized that this small trucking company was undergoing significant expansion, adding warehouse and dock locations, backed with additional equipment and administrative staffing.  They were also adding more drivers, mostly owner-operators, and company-owned trailers.  The growth was financed with the Company’s receivables because it did not require a personal guarantee from the owners.

As with most receivables financing contracts, terms provide the lender with the most favorable accounts receivable.  The business was quickly running out of available cash to borrow.

The controller also identified another problem, collections on the accounts receivable.  The receivables aging reflected many old, unpaid invoices that were excluded from the borrowing base and the Company had no experienced collections staff.  Customers were mainly small “mom & pop shops” who did not feel compelled to pay for freight on merchandise they had already received.  The controller pressed the owners for a new customer approval process based on a credit review and received approval to hire an experienced collections clerk, and we began to see cash flow in from the efforts.

Some customers did not appreciate the outstanding debt reminders and complained to the sales team.  Concerned with growth and freight tonnage rather than cash, the owners directed the controller to cease collection activities and lay off the collections clerk (“at will” to the rescue!).

Uncontrolled spending continued until the borrowing base was at a maximum with invoices and payroll pending.  The owner approached the controller one morning and asked her to make changes to the accounts receivable ledger, changing names of customers that were an “excluded” class in the borrowing base so that they would appear to be valid within the borrowing base.  “For example,” the owner said, “change Yellow Freight to Yellow Mining and Manufacturing.” Refusing to compromise her integrity, the controller declined to follow the owner’s instructions, advising that the change was “unethical and illegal.”  Later that week, the Company used the “at will” provisions to relieve the controller of her duties for having “insufficient experience.”

Needless to say, the cycle of deception self-destructed, and approximately a year later, the Company filed Chapter 11 bankruptcy, and eventually Chapter 7.