detecting and preventing corruption in merges and acquisitions 1

AgincourtInternational Security Management

Detecting and Preventing Corruption

inMergers and Acquisitions

Detecting and Preventing Corruption in Mergers & Acquisitions

Many mergers and acquisitions have resulted in horror stories-there was internal corruption that was undetected during diligenceand it remained undetected for far too long after the transaction was

completed.

The following presentation shows areas that should be scrutinized and the steps taken to ensure there are no unpleasant surprises.

Our goal is to quickly identify corruption and take appropriate remedial action.


Even the best due diligence cannot discover all instances of:• Conflicts of interest• Fraud• Internal theft• Unethical management behavior• Sexual harassment


• Venture Capitalists and Investors look for bargains• Bargain companies often have cash issues and have

“economized” by:• Reducing staff• Reducing audits• Cutting salaries• Not enforcing policies and procedures• Not properly vetting vendors• Ignoring warning signs and red flags


Economizing measures create temptation in the workplace.

TEMPTATION + OPPORTUNITY = MORE CORRUPTION


When assessing the potential for corruption in a merged or acquired company, the following areas should be reviewed:

Ethics Policy / Code of ConductHiring Policies and PracticesProcurement Policies and ProceduresNepotism PolicyTurnoverExpense ReportsTheft and Incident Reports

Insurance Claims


Ethics Policy / Code of ConductDoes the company have an Ethics Policy / Code of Conduct?Is it in line with your company’s Ethics Policy / Code of Conduct?How often do employees receive Ethics Training?How are violations reported?Who receives reported violations?Is there a written procedure for dealing with violations?


Hiring Policies and PracticesDoes the company conduct background checks on all employees?Are the background checks conducted internally or contracted?Does the background check include:Education VerificationCredit CheckReference VerificationSocial Media CheckCitizenshipDoes the company conduct pre-employment and post-employment drug

screening?


Procurement Policies and ProceduresDo the company’s procurement policies and procedures meet industry

best practices standards?Has the procurement department been routinely audited?Does the Procurement Department have a conflict of interest policy and has it been enforced?


Nepotism PolicyDoes the company have a nepotism policy and is it enforced?Often, small companies and privately held companies hire family

members at all levels It is critical to understand familial relationships in companies that

have been merged or acquired, including vendor relationships


In addition to the areas already mentioned, the following should be reviewed and discrepancies addressed:

TurnoverExpense ReportsTheft and Incident ReportsInsurance Claims


Turnover

Turnover should be reviewed to determine if any areas of the company have higher turnover than others and if so, why?

High Turnover is indicative of: Poor management

Substandard or unsafe working conditionsManagement misconductBias and/or discrimination


Expense Reports Expense reports should be audited to determine if individuals or business units have higher than average expenses especially under the

entertainment categoryRed flags include individuals who do not submit receipts with their

expense reportsIndividuals or units with higher than average and/or undocumented

expenses should be scrutinized for other discrepancies as this can be indicative of other unethical behavior


Theft and Incident Reports

Theft and incident reports should be reviewed to determine if there is a pattern to what is being taken, where the thefts occur and the frequency

Excessive theft is indicative of poor physical security, inadequate checks and balances or internal theft


Insurance Claims Insurance claims should be reviewed to determine if any patterns exist

that indicate recurring issues or if there were any “extraordinary” lossesContested or denied claims should be carefully reviewed with the carrier to determine if there were any suspicious circumstances surrounding the claimAny suggestion of insurance fraud should be thoroughly investigated


Action PlanThe Human Resources (HR) Department is key to implementing an anti-corruption cultureThe acquiring company should carefully evaluate all HR

personnel to determine if they are capable of supporting its goals and objectives

Individuals who cannot effectively implement new programs should be replaced or reassigned


Action Plan – Ethics An Ethics Policy / Code of Conduct is the cornerstone for detecting and

preventing corruptionIf the existing program is deemed to be inadequate, a carefully

structured transition program should be implementedEmployees at all levels should participate in meetings to discuss ethics

and conduct and their input solicited to improve the existing programIf employee feedback is incorporated into the new program, it is more

likely that employees will take ownership of the values and principals necessary to prevent corruption and unethical conduct


Action Plan – Ethics Once the Ethics Policy/Code of Conduct is ready, employees at all levels

should participate in the trainingIt is critical that top management is perceived as owning the program,

placing a high value on ethics, and setting a leadership example and toneA toll-free 24/7 Ethics Line should be initiated so that employees can

anonymously report violations or concernsA trusted senior management person in HR, Legal or Audit should receive the reports and be responsible to ensure they are properly investigated.An Ethics Committee should meet monthly to review reported violations and follow-up


Action Plan – Hiring Policies and PracticesHiring Policies and Practices should be reviewed to ensure that they are

adequate to screen out undesirable applicantsIf background screening is inadequate, it should be immediately upgradedThe files of managers should be reviewed and new background checks

conducted if necessaryDrug testing policies and procedures should be reviewed. If inadequate, a new program should be initiated and all employees tested


Action Plan – Procurement Policies and ProceduresProcurement policies and procedures should be reviewed and brought

into line with industry best practicesProcurement personnel should be required to put in writing any conflicts of interest or potential conflicts of interest per the new Ethics Policy/Code of ConductVendor files should be audited to determine if bidding procedures were

usedVendors should be randomly verifiedAny discrepancies or suspicious activity should be investigatedIf necessary, vendor services should be re-solicited


Action Plan – Nepotism/Conflicts of InterestAs per the Ethics Policy/Code of Conduct, employees must disclose all

familial relationships at work and with suppliers, as well as any conflicts of interest or potential conflicts of interest

Each reported instance should be carefully evaluated to determine if such a relationship compromises a professional working environment and

changes made as necessaryFailure to report familial relationships or conflicts of interest should be

dealt with as violations of company policy

YOU GET WHAT YOU

TOLERATE


Action Plan – Investigations Each instance of identified questionable activity should be investigated

and a report of investigation submitted to managementEmployees need to understand that suspected or identified ethical

violations will be promptly and fairly investigated and appropriate action taken as necessary

Investigations are critical to ensuring that new policies and procedures are effective and adhered to

AgincourtInternational Security Management

Frank Dupuy, Founder and President of Agincourt International Security Management, has many years of experience in assisting companies with successfully mitigating internal corruption, including those risksassociated with international transactions. Dupuy is bilingual in English and Spanish.

Frank can be contacted at:[email protected](713) 410-9101

mailto:[email protected]

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