Last week, I received an email from my professional institute, the Royal Dutch Professional Institute of Auditors – NBA, and it featured an interesting debate about how to deal with fraud. The debate was triggered by a NRC newspaper article by the former Chief Legal Counsel of Royal Ahold, Mr Peter Wakkie. The email news letter featured an article in which a public auditor, Mr Peter Diekman, expressed his sour opinion on Mr Wakkie’s recommendations.
This – to a large extent mutual – sourness is not uncommon between lawyers and auditors. Perhaps because both are well paid professionals and somehow feel that they are in competition with each other. Quite ridiculous in fact as auditors and lawyers are mostly each other’s opposites and especially when it comes to (im)partiality and (in)dependence. Even competence and diligence could not result in competition as they are both merely prerequisites for doing a good job.
Mr Wakkie’s 5 recommendations in case of a fraud are quite valid for any company management: 1. shut up, 2. take your time, 3. do not confess, 4. control your lawyers, and 5. secure adequate cash. Clearly, Mr Diekman does not like this as he concludes: “The NRC article gives a very partial and especially a very arrogant view on current corporate governance. The current generation of directors and advisers should benefit from outweighing the principles of soft controls over this advice from one of the past generation advisers”.
To be honest, I do not like lawyers very much given their notorious partiality and fundamental lack of independence. I have spent 4 years in court and actually hate their ongoing lies on behalf of their clients. Being a Registered Accountant myself, I would not even have the luxury of lying to court even if my morals would have allowed that – which they do not. I perfectly understand the phrase “The first thing we do, let’s kill all the lawyers” by William Shakespeare (Wiki, WSJ). I have never heard anybody suggest to kill all the auditors. Usually auditors are quite harmless.
Nevertheless, during my entire working life I have appreciated the professional advice by corporate lawyers. Usually we retained the best advisers available in the market. They are largely overpriced but I never had to pay them from my own pocket, as a CFO. The best advisers usually advise you to settle quietly and not to go to court. After spending 4 years in court – personally, not for business – I fully agree by now. Unfortunately, that advice requires two sensible parties.
The fundamental reason why I agree with Mr Wakkie, and not with my audit colleague, is that the essential goal of any business is continuity and not communication. Any fraud is often a major distraction for management and the money is very unlikely to return. Moreover, frauds are usually very hard to proof – let alone in court. A very unpleasant side effect of frauds, is the suspicion against certain colleagues. Not being able to trust your own colleagues is a terrible thing. I have been there. And any person is innocent until proven guilty. So, all in all, Mr Wakkie’s advice is smart.
I could mention some further technical arguments: soft controls are merely preventive, auditors unlike lawyers may show a CYA approach, an identified fraud may be part of an even bigger fraud.
I have said several times in my blogs that one of my biggest disappointments in (business) life, was my transfer from audit to business. I realised how little I had known of my clients and even felt a little ashamed about my prior audit recommendations to management. My transfer from audit to business also made me realise the truth in a joke by a former headhunter: “Leon, do you know where the letters RA stand for? Redelijk (Dutch for “pretty”) Arrogant”.
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