Tag Archives: ethics

When To Fold ‘Em

Sports-betting

We are a household of sports fans and this tends to be just about the only live television that we watch. Because we can’t fast forward through the commercials during live games, I have watched commercials about daily fantasy sports. A lot of commercials about daily fantasy sports (DFS). It doesn’t matter whether it is DraftKings or FanDuel, as they both seem just about the same. I have heard about how you can win millions, practically for free, and about how easy it all is. I know nothing about fantasy sports, and I have come away mostly irritated by how ubiquitous the advertising is than wanting to try out the daily fantasy sports scene. I also don’t trust them when they tell me that I could win money for nothing and, instead, I wonder how they could claim to give away so much money for nothing and still pay for the many, many ads that are everywhere we look.

Answers came to me at the beginning of October, when a DFS scandal hit the news. As the story went, a DraftKings employee released key information earlier than he should. This information, if known, would give someone a tactical edge when playing fantasy football. The same employee also won $350,000 betting at FanDuel. Even though this doesn’t look good, DraftKings says they are certain that, even with an extra $350,000 in his pocket, their employee did not act improperly – he merely made a mistake. As I read the story, I shook my head in disbelief. I was surprised by several things. First of all, I was surprised to discover that Daily Fantasy Sports betting is not considered to be gambling. Now, I know hardly anything about daily fantasy sports, so it may indeed be a game of skill and not luck. However, especially with terms like “betting” used when talking about it, it sure does look a lot like gambling. That said, interviews that I have seen and read show those who spend a lot of money on DFS referring to it as investing. Nevada recently shut down DraftKings and FanDuel, declaring that DFS is gambling and that the two companies need licences before they can operate in that state. So, in that regard, let’s go with more and more people are agreeing with me on the whole “is it gambling” question.

More surprising, though, was the employee betting. To have a company that runs the betting allow its employees to bet as well smacks of impropriety, regardless of whatever steps the companies claimed they took to keep things on the up and up. Both FanDuel and DraftKings would not let their employees bet with them but those same employees, armed with whatever insider information they might (or might not) have, were able to go to competitor sites and bet there. And bet they did and how surprised are we to find out that the top winners in daily fantasy sports tended to be employees of DraftKings and FanDuel (though never from their own employer, of course).

As I read articles and watched news pieces on what was going on in the Daily Fantasy Sports realm, I kept exclaiming, to anyone within earshot, “who thought this was okay? How could they think it was okay?”

I couldn’t believe that management at this company could look at the set up was acceptable. Maybe they did, or maybe they just thought they could get away with it but it has me wondering about what operation and control policies other entities have in place that either do not protect them and their assets, or even put them at greater risk. Just because you institute a rule, it does not mean that it is a good or useful rule. For instance, DraftKings employees, with all the inside information they potentially had access to, could not place a bet with their employer, DraftKings. However, they could log into FanDuel, their competitor and use their edge when placing bets there. And the policy was mirrored by FanDuel. Looking in from the outside, both companies appeared to be acting unethically, and just about always, perceptions are as powerful as reality. If it looks as though someone is having a $350,000 party with your money, the facts will matter very little to you.

It might feel very managerial to make rules in your organization, but if all they serve to do is fill operations manuals and make you feel good, they are achieving less than nothing. It is worse than not making rules at all because, at least when you don’t have regulations, you have no illusions about whether or not you are protected. On the other hand, creating a free for all entity may make you feel like the cool kid and may even have people clamoring to work for you. However, among those clamoring, it is almost guaranteed, will be those seeing ample opportunity to commit fraud and perhaps lay waste to your business. There are very important reasons why people like me preach setting up your business in ways that prevent and detect fraud and two of these reasons are protecting your assets and protecting your reputation.

Now, FanDuel and DraftKings are finding themselves on the defensive and being given the cold shoulder by entities who do not want to be tainted by the growing scandals. They are being investigated by state and federal authorities, and are now scrambling to clean up an image that would never have been sullied if they had formed their operating and control structures correctly and ethically, in practice and appearance, from the get go. Now they are tripping over themselves, doing things like creating self-regulatory bodies in order to regain the trust of the public. Judging from what I have read, that is not working very well – something that happens when a company has betrayed the public’s trust. Instead these companies are being put under the microscope and their reputation is taking a beating. They are on the defensive now and all of this could have very easily been avoided. If you are running a business, you should ensure that you consult with a qualified professional to avoid issues such as:

  • Conflict of interest in perception and reality;
  • Approaches that compromise your reputation; and
  • Procedures that may cross legal lines.

Spending time and resources doing things property in the first place is less costly, in dollars and reputation, than trying to clean things up after the damage is done. That kind of disaster can be very difficult to come back from. Is it something you are ready to bet on?

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More Equal Than Others

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Every time he is channel surfing and comes across The Godfather, my husband, James, watches it. It doesn’t matter whether the film is one minute or one hour in, he stops and watches the rest of the movie. He never tires of it. He is happy to watch The Godfather every day of the week, if that is how often it pops up on the television. In high school, I had a similar relationship with Animal Farm (and some other books). It is a good thing that I didn’t mind reading Animal Farm, because it was a book we studied, at great length, in school. It has been many years since I read the book, but the commandments stick with me. For those that have not read Animal Farm, in a nutshell, animals on a farm rise up against the humans and come up with seven commandments. The commandments include declarations like “No animal shall drink alcohol” and “No animal shall kill any other animal”. However, as time goes by, some animals are sucked in by the intoxicating nature of power and the commandments are amended – “No animal shall drink… to excess” and “No animal shall kind any other animal… without cause”. This week, when Jim Ulvog wrote to me about UBS in the news, I was reminded of the commandment that was, initially, “All animals are equal” but morphed into “All animals are equal… but some are more equal than others”.

Last year, when writing about high frequency trading, I mentioned dark pools. Watching the news, the stock market that gets the most coverage is the New York Stock Exchange (NYSE). However, there are 16 national securities exchanges and then there are a further 45 so-called dark pools. Dark pools are not easily accessible to the public and are run by private brokerages. UBS ran one such brokerage and the SEC charged this brokerage with telling its customers that they were all equal while behaving as though some customers were more equal than others. In doing this, they not only violated their customers’ trust, they also, allegedly, violated securities law.

Dark pools are so-called because they give anonymity to the traders who use them. Like an extreme version of poker, in dark pools, the identities of the traders and the size of their orders are kept secret until the orders are filled. In this way, dark pools give traders the freedom to trade without other parties being privy to what they are doing. However (according to the SEC’s charges), with UBS, it turns out that UBS was operating its dark pool at an additionally shady level and giving some of its clients flashlights. For example, to its market makers and high-frequency traders, it gave the option, called PrimaryPegPlus (PPP), of being able to bid in fractions of a cent, despite this practice being illegal. So these PPP customers were able to jump ahead of customers bidding in, legal, whole penny prices. Furthermore, UBS did not disclose this and other practices to all its customers. So the uninformed customers were trading in this dark pool, thinking that they were equal to the other members of the dark pool, while, in reality this was not the case. It is as though UBS held a road race that a bunch of people entered but then UBS picked out a few cool kids and, secretly, gave them rocket-propelled shoes.

Trading in the various securities markets is complicated enough as it is, with some players being more experienced and sophisticated than others. We have high-frequency traders who use complex tools, large volume and nano-second speeds, tools that the ordinary man on the street generally does not have access to. To add to all of this complexity, if you have the markets advertising themselves as one thing, but selling something completely different, something that gives clandestine, unfair advantage to a group of clients over another, that just doesn’t sound right. It didn’t sound right to the SEC either – they fined UBS $14.5 million (even though UBS neither admitted nor denied guilt when paying the fine). Maybe that’s because the Animal Farm commandments are, right or wrong, just the way things are?

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True Tone at the Top

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I am reading “Tragedy of Fraud – Insider Trading Edition“, a book recently released by James Ulvog. This is the story of Scott London‘s journey from KPMG partner to prison inmate. James Ulvog covered this story in depth, from the moment it broke up to when Scott London went to prison. I would not be surprised if Jim picks up the story again when London is released from prison. In the book, Jim has spoken about the possible consequences of London’s crime and a lot of these stretch well into the future, potentially affecting him both professionally and personally. It is always a big disappointment when members of the CPA profession completely disregard the ethical and professional standards that have been set by the various governing boards. It is, therefore, important when people like Jim of Attestation Update and Francine McKenna of re: The Auditors
call out the CPAs who are setting a terrible tone at the top of their profession.

It is equally important, if not more so, to recognize those who have provided a positive contribution to the CPA profession. We are trusted professionals for a reason; it’s not just empty rhetoric. A little over a week ago, I had the indescribable privilege of meeting Bernadine Coles Gines, CPA. I am pretty sure this is not a name you have heard before, but she is a woman worth learning more about. I met her at a New York State Society of CPAs (NYSSCPA) ceremony honoring the 60th anniversary of Bernadine Coles Gines’ CPA license. This is a big deal because Gines was the first black woman to receive the CPA license in New York State. It becomes even more of a big deal when you learn more about the challenges she faced, both while working towards becoming a CPA and beyond.

Bernadine Coles Gines moved to New York City from Virginia, where she is originally from, to get her master’s degree at New York University. She moved because, at the time, Virginia’s segregation laws kept her out of graduate school in that state. Once Gines had graduated and passed her CPA exams, she looked for work. She found that she could not find work with a black CPA firm in New York City because they would not hire women. She also found that she could not find work with white CPA firms because they would not hire black people. While interviewing at a white firm, one partner told her that, even though he could not hire her, perhaps Gines could help his wife, who was looking for a maid. She was finally hired by a two-partner Jewish firm, but only after she had convinced them that she was not a communist. Of course, getting work was in no way the end of her challenges but at no time did Gines give up or compromise. She persevered and continued to work toward achieving her goals, despite (or perhaps more resolved, because of) the challenges in her way.

I read a little about Bernadine Coles Gines before I met her, but when I met her, I was even more impressed. She spoke of her principles and her determination and her story is living proof of both. To come to face to face with a person who epitomizes unwavering grit and the drive to stand by what she believes in is truly motivating. To learn about people like Bernadine Gines reminds us about the types of people who have made CPA the trusted professionals that they are and they also show why we harshly judge those who give us a bad name. They are a reminder to us and to those we serve of those of us who are professional, ethical and will stand strong, despite the pressures put upon us.

You should go out and learn more about Bernadine Gines and others like her. As though her achievements were not enough, she shared during her interview, that her sister, Ruth Coles Harris, was the first Black woman to be certified as a CPA in Virginia, in 1963. Ruth Coles Harris faced challenges of her own when she decided she wanted to be a CPA. I wonder what those family reunions are like – I would hate to be the black sheep in that family (if they even have one). I am truly fortunate that I had this incredible opportunity to meet Bernadine Coles Gines and that I was reminded how important it is to uphold ethics and principles and that I should not compromise, especially when things are very challenging.

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Easy Going Down

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I am big on Ethics and I am glad when they are spelled out in a straightforward way. So, I am excited to see that the AICPA’s revised Code of Professional Conduct has made the subject of ethics easy to access and clearer. This is where the standards that CPAs are held up to are put into words and the easier those words are for everyone to understand, the better it is for all of us. It’s not just “trust me, I know what I’m doing”, it’s “look here and see what I am supposed to be doing. There is a code that I abide by and here it is in plain English.”

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Who’s Toning the Top?

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This week, Scott London, a KPMG ex-partner was busted. It was the getting busted that resulted in him going from partner to ex-partner. It turns out that, for several years, Scott London had been passing on non-public information about at least two of his clients, Herbalife and Skechers, to a golfing buddy, Bryan Shaw. Shaw then used this information to make over a million dollars on the stock market. London was caught during an FBI sting that included a photo of him receiving a bag of money from Shaw in a parking lot. A parking lot. Straight out of the movies. It is a very interesting case that is still unfolding. We are learning a lot about how and what happened and perhaps we shall also learn why it happened. Why did this KPMG partner (at the time) decide to share confidential client information with his friend and take expensive gifts and cash, a fraction of his annual salary, for this information? Discovering the motivations will be interesting but right now, this case has me thinking about another issue.

This case brings up, to me, the issue of “the tone at the top”. This is the example that a company’s management sets that may affect how ethically employees may behave. As a CPA, forensic accountant and a former auditor, I know that ethics are a big part of our education and continuing education. The stress on ethics is part of why CPAs have been found to be the most trusted business professionals, according to surveys. In addition to the required ethics continuing education that credentialed forensic accountants, and CPAs, have to complete, laws and firm policies go a long way to trying to ensure that an accounting professional is objective and, in many cases, independent from his or her client. For example, audit firms practice partner rotation with their public company clients. This means that every five years public firms will have a new partner managing their audit. Also, forensic accountants, before accepting an assignment, will run a check to ensure that there is no conflict of interest. Even the appearance of a lack of independence can result in people not trusting their accountant, whether that accountant is performing an audit or forensic services.

There are many rules and regulations to try to maintain the integrity of the accounting profession but as partners are at the top of the totem pole, it is very important to know who is watching those at the top? What is being done to make sure that those at the top are not abusing their positions of power by compromising their ethics. The evidently casual way that Scott London shared confidential information with his golf buddy implies that he either did not believe that there would be significant consequences if he were caught or that he would not get caught at all. Although he took his actions outside of the control systems created by the audit firms which include the disclosure of investments to prevent a conflict of interests, there were the investigations by other agencies, the FBI in this case, that flagged Shaw’s suspicious trades. That is a comfort. Hopefully, as this case and story unfold we will have the full power of the law descend upon London for his insider trading. In addition to the charges being leveled against London by the FBI and the SEC, KPMG has stated that it will be bringing legal actions against London. It should be more than lip service. KPMG and other CPA firms must realize that how they deal with their most powerful and senior practitioners goes a long way to ensuring that they remain trusted and held in high esteem.

Granted, every profession will have bad apples – unscrupulous people who have little regard for the profession. When it comes to being a CPA, a license where members agree to practice according to very high standards, it is imperative that those who are caught violating the code of conduct and the law are dealt with strictly. Partners of the Big Four accounting firm are more in the spotlight than other accountants and it should be clear that a position of power does not exempt one from discipline – in fact, the position of power should mean that you are more disciplined.

Finally, according to the United States Golf Association, London has a handicap of 10 and Shaw’s handicap is 12. Generally, a lapse in honesty tends to extend beyond just one event. A person who is gaming one system is likely gaming others. It is probably a good idea to check on that handicap, though I doubt either of those two men will be playing golf any time soon (at least I hope they are too busy paying for their behavior to do so).

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