Pay at­ten­tion

Niehaus sign of a big­ger stink

Finweek English Edition - - Openers - Carl Niehaus BRUCE WHIT­FIELD brucew@fin­

CARL NIEHAUS’S predilec­tion for spin makes it hard to be­lieve any­thing he says, es­pe­cially af­ter he’s ad­mit­ted to be­ing less than re­li­able with other peo­ple’s money. The prob­lem, warns one of his for­mer em­ploy­ers in an un­re­lated re­port, is that work­place fraud is likely to worsen as the eco­nomic cy­cle turns for the worse.

Just how deep are Niehaus’s fi­nan­cial woes and just how much at­ten­tion should man­agers be pay­ing to the per­sonal fi­nances of their most trusted col­leagues? Prob­a­bly more than is comfortable in a col­le­gial en­vi­ron­ment. We’re un­likely to learn just how bad the for­mer ANC spin-doc­tor’s fi­nances are without a foren­sic au­dit of his ac­counts, which may only hap­pen if he’s pros­e­cuted for his al­leged nu­mer­ous fi­nan­cial in­dis­cre­tions. We do know what he’s ad­mit­ted to; we also know he was happy to keep the truth of his au­da­cious spending habits, his debt lev­els and fraud­u­lent at­tempts at ex­tri­cat­ing him­self from those po­si­tions as tightly un­der wraps as pos­si­ble while de­fend­ing the po­lit­i­cal rep­u­ta­tions of his mas­ters.

Had the mat­ter not ever been aired, Niehaus and his po­lit­i­cal su­pe­ri­ors – whom he claims had knowl­edge of his “habits” – would have been happy to let them be. Af­ter all, he was good at his job and a use­ful bloke to have on your side when the chips were down.

Could this hap­pen in the cor­po­rate world? It most cer­tainly could – and does.

How­ever, a strict in­ter­pre­ta­tion of the Preven­tion and Com­bat­ing of Cor­rupt Ac­tiv­i­ties Act 2004 should dis­suade se­nior ex­ec­u­tives from cov­er­ing up for one an­other. The Act makes it an of­fence for a per­son in au­thor­ity to not re­port to the po­lice al­le­ga­tions of fraud or cor­rup­tion worth more than R100 000.

Cer­tainly Niehaus ap­pears to have left a trail of fi­nan­cial em­bar­rass­ment in his wake, whether it was at Deloitte (where he was a part­ner), the Pres­i­dency, Rhema Church (where he served as CEO) and the Gaut­eng Eco­nomic De­vel­op­ment Agency (GEDA, which he ran un­til try­ing to use his in­flu­ence to gar­ner sup­port for his per­sonal fi­nances). The pre­cise cir­cum­stances of his GEDA de­par­ture re­main un­clear, due to con­flict­ing ver­sions of how a let­ter in which Niehaus al­legedly promised a com­pany pref­er­en­tial treat­ment on the rental of Gov­ern­ment build­ings came to light.

A sur­vey by Deloitte re­veals that in un­cer­tain eco­nomic times staff at com­pa­nies tend to be­come more un­set­tled and con­cerned about their fu­ture. That’s when they be­come more in­clined to take ad­van­tage of their po­si­tion for their own fi­nan­cial gain.

Foren­sics firms re­port a spike in in­ter­nal fraud and of­ten what starts out as pil­fer­age can es­ca­late when not dis­cov­ered early. “Of­ten peo­ple fall on hard times and tell them­selves they’re just bor­row­ing it and will pay it back – but it escalates and they can’t get out of it,” says Steven Pow­ell, head of foren­sics at Ed­ward Nathan Son­nen­bergs. “There are three el­e­ments to white-col­lar crime: pres­sure, op­por­tu­nity and ra­tio­nal­i­sa­tion,” he says.

Deloitte says com­pa­nies need to be­come in­creas­ingly vig­i­lant about fraud con­trols dur­ing an eco­nomic down­turn. Temp­ta­tion presents it­self par­tic­u­larly to trusted, long-serv­ing em­ploy­ees and, in par­tic­u­lar, in an un­mo­ti­vated work­force where jobs have been shed and an in­creased bur­den is car­ried by those who re­main be­hind.

The au­dit firm says rather than cut back on in­ter­nal checks and bal­ances as a cost-sav­ing mea­sure, com­pa­nies should in­crease their mon­i­tor­ing of fraud con­trols and test their ef­fec­tive­ness. In a detailed in­ter­na­tional study the firm found most in­stances of fraud occurred at con­sumer com­pa­nies, such as re­tail­ers, fol­lowed by the tech­nol­ogy, me­dia and telecom­mu­ni­ca­tions sec­tors. The most com­mon types of fraud were rev­enue recog­ni­tion, ma­nip­u­la­tion of ex­penses and im­proper dis­clo­sures.

There’s also a warn­ing for share­hold­ers and reg­u­la­tors from an­other global au­dit firm, KPMG. It warned in a De­cem­ber 2008 re­port that var­i­ous forms of cor­po­rate malfea­sance come to the fore in times of eco­nomic dis­tress. “In a volatile eco­nomic at­mos­phere – such as the one in which we cur­rently ex­ist – there’s an in­creased threat of ‘ black holes’ ap­pear­ing in fi­nan­cial state­ments and ac­counts of busi­ness per­for­mance,” write the re­searchers. “His­tory has shown that dur­ing times of com­mer­cial dis­tress some man­age­ment feel com­pelled, at any cost, to main­tain share price or in­vestor con­fi­dence, avoid breach­ing bank­ing covenants and fraud­u­lently seek new sources of fund­ing – all in the name of pre­serv­ing jobs, lifestyles and bonuses. Such be­hav­iour can be toxic.”

Mike Sav­age, head of Ernst & Young’s Fraud In­ves­ti­ga­tion and Dis­pute Ser­vices group, says: “Pre­vent­ing fraud is far bet­ter than deal­ing with the con­se­quences – and that’s why com­pa­nies need to step up their ef­forts to fight fraud.” Sav­age adds ex­ec­u­tives should closely mon­i­tor em­ploy­ees liv­ing be­yond their means, those that achieve re­sults that ap­pear out of line with ex­pec­ta­tions or any­one who shows a tol­er­ance of wrong­do­ing.

Loves the good life.

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