SEC and Whistleblowers: Can robots come to the rescue?

Saw this following news alert from AccountingToday:

"The Securities and Exchange Commission announced that it had awarded more than $5.5 million to a whistleblower. According to the SEC, the whistleblower directly reported critical information to the commission about an ongoing scheme at their workplace, and that led to a successful enforcement action..."

The article also gives some useful stats on the number of whistle-blowers coming out and the total number of payouts, so check it out.

This is good news in terms of promoting the idea of speaking truth to power. Without such assistance it can be quite difficult to encourage whisteblowing.

We often have a romantic notion of what it is like to tell the truth when there is a drive by all of those around us to commit fraud. Too many Hollywood blockbusters make us believe, falsely, that there is always a happy ending where the good guys win.

For a reality check, we should take a look at Alayne Fleischmann's ordeal in attempting to blow the whistle on the mortgage fraud at Jamie Dimon's JP Morgan Chase. As Rolling Stone's Matt Taibbi notes:

"Fleischmann...had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower...Thanks to a confidentiality agreement, she's kept her mouth shut since then. "My closest family and friends don't know what I've been living with," she says. "Even my brother will only find out for the first time when he sees this interview."

As she notes in the video below, the reality of such environments is that there is subordination of the "compliance" functionsto enable the fraud to go through (e.g. the Due Diligence manager got angry when people thought that the loans were bad), lack of effective segregation of duties (e.g. sales people were involved in the due diligence review), and other issues:



Can robots come to the rescue?

When looking at process automation more broadly, we see that one of the "side benefits" is compliance. For example, when library loans out e-books they are never returned late as the patron's access to the digital copy on the reading device is removed right on the due date. Similarly, with autonomous vehicles they never speed, fail to complete to a full stop and the like.

Insurance companies have attempted to use what we can call "compliance tech" by offering drivers a discount for good driving if they are willing to install a monitoring device in their car. As noted in the CBC article, Desjardin Insurance has noted that 7000 people have for this offer which they call Ajusto. As can be seen in the video, Ajusto also leverages gamification and social to promote this program.


Although they have promised that such technology can't be used to penalize the driver, many skeptics are not sure that it will turn out that. For example,  Leonard Kunka, a motor vehicle litigation lawyer, notes:

"It's an invasive technology. It provides a lot more information than insurers currently have to set premiums, and I question whether it's any better than what the insurers use today to set premiums, which is a person's driving record and their history of collisions and accidents."

In other words, can we expect the insurance companies to maintain rates when they can "see" the driver constantly breaking speed limits? Conversely, can we expect them to lower rates when they see that people can drive safely above the speed limits?

Although I doubt it, the reality of such compliance-tech is that it is only used by people who are already compliant: the others who are not compliant would not sign-up for such technology and even if they did would somehow subvert it - as we saw with the whole Volkswagen emission debacle:

"In the test mode, the cars are fully compliant with all federal emissions levels. But when driving normally, the computer switches to a separate mode—significantly changing the fuel pressure, injection timing, exhaust-gas recirculation, and, in models with AdBlue, the amount of urea fluid sprayed into the exhaust. While this mode likely delivers higher mileage and power, it also permits heavier nitrogen-oxide emissions (NOx)—a smog-forming pollutant linked to lung cancer—up to 40 times higher than the federal limit. That doesn’t mean every TDI is pumping 40 times as much NOx as it should. Some cars may emit just a few times over the limit, depending on driving style and load."
Ultimately, technology is only good as the people that support it and so we can't abdicate such responsibility to technology. Instead, we need to continue to encourage people morally and financially to speak the truth when the see things go awry.

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else

Monitoring the FIs: Auditors to the rescue?

Wall Street Journal had an interesting article earlier this week on the inner workings of out-of-court settlement deals with FIs. It noted how Western Union had to use a "monitor" to independently oversee the implementation of policies and procedures to remediate it's business practices that were found to be illegal by the Arizona's attorney-general. Specifically, the company had to pay $94 million (this was mentioned in the AG's website, not the WSJ article) for facilitating "blood wires" on behalf of "organized criminal cartels that seek to profit from Arizona’s porous border".

Activists, such as Matt Taibbi, have criticized such out of court of settlements as examples of a two-tiered justice system. He specifically cites how HSBC paid $1.9 billion for laundering drug money, but no jail time for the CEOs. In contrast, Cameron Douglas, son of the famous Michael Douglas, got 5 years for drug crimes (including possession and dealing).

Regardless of such a critique, it does give insights into how the audit profession can play an effective role in balancing the needs of businesses and oversight. The WSJ article goes into some detail as to how monitors are chosen by law enforcement officials (and the companies themselves) to ensure that the corporate governance and controls are implemented to ensure that the particular indiscretion does not occur again.

The article focused on the relationship between one of the monitors, Ted Greenberg (who according to the WSJ was a prosecutor) and his work with Western Union. However, Greenburg and Western Union had a fallout over the aggressive nature of his recommendations. The Arizona AG agreed and fired Greenburg.

And that's what I find interesting. Often the concept of "reasonable assurance" is something that non-auditors find hard to digest. And it seems that this could have played a role in the overbearing recommendations provided by Greenburg - who is a prosecutor not an auditor. And as it turns out, the Arizona AG seems to have the same line of thinking: they ended up replacing Greengburg with BDO.