Category Archives: Norman Katz

Service Misrepresentation is Fraud

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

As a consultant, and given my areas of specialty, I never always & fully know what to expect when I am engaged by a client, as there is always something new to discover. But before I accept any assignment, I perform due diligence to ensure I’m the right person for the job. My due diligence involves a detailed discussion as to the problems the organization is having, technology environment, geographic location, etc. Sometimes I can steer the organization towards a different – and better – solution path, removing me from consideration. It doesn’t pay the bills but it’s the ethical thing to do.

I’m often left with the decision about whether I’m the right person for the job because I know better than the perspective client what my skills and talents are. If I’m not familiar with certain software or hardware, or the problem lies in a situation or industry I’ve not experienced, I’ll tell the perspective client this. It won’t necessarily negate my chances of selected as the solution provider, because experience has told me that as long as I can quickly acclimate myself to something and have (closely) related experience, I’ve got a good chance of getting the project.

I believe it’s absolutely necessary, in all fairness, to set the expectations as realistic as possible from before the beginning (during the “interview” stage). In no way do I want to surprise a client with what I don’t know during an engagement, after being paid monies leading up to that point.

Some former colleagues of mine asked me into a company they were trying to help; the discussion would center on implementing several unused modules of their Enterprise Resource Planning (ERP) system, and that some data migration and creation would be required. Now, I’ve helped clients with everything from QuickBooks® to SAP®, and with hardware platforms such as Unix®, Linux®, Windows®, AS/400®, and IBM Mainframe. I’m able to do this because I work with my clients’ technology staff or technology provider service companies in concert with my own technical skills. However, despite expertise in some areas, it would likely be more correct to label me an ERP generalist.

I went in and met with the company, and it wasn’t too far into the discussion that I realized they had been told I was something of a “knowledge expert” on their particular ERP system, and the conversation went down from there, as I informed the meeting attendees that while yes, I could perform the work needed (and had done so before in other ERP systems), certain criteria had to be met on their end, such as did they have administrative access to their database and the import/export module. (I had done my homework on their ERP system before I went in.) For each question I asked, the company operating officer and lead technology person had no idea, and neither did my colleague.

Well, I had two choices: hang my colleague for the misrepresentation in front of everyone, or take the bullet myself, and I opted for the latter rather than the former, because that’s the kind of person I am. Later at lunch with my (now former) colleague, I was criticized for my sales pitch: I should just shut up and take the work and then explain the nuances and details later. (Never mind that it’s those nuances and details that are important to understand up front to ensure I was right in accepting the assignment in the first place!)

One definition of fraud describes it as a breach of confidence, and misrepresenting ones’ skill set is, in my opinion, fraud.

Regardless of what line of work you are in, (purposeful) misrepresentation is fraud, pure and simple.

I’ve probably turned down more assignments than I’ve accepted in my consulting career, but when you compromise your integrity and dignity, you lose your credibility because eventually your fraud will be revealed, and by that time it’s too late.

Norman Katz, Katzscan

Sloppiness or Fraud?

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

A Florida Department of Children and Families supervisor – with 20 years at the agency – bleeds off small amounts of money – not greater than $900 at a time, though sometimes several times per day – from funds set aside for families in need. Total take before she was caught: $1.54 million, money that could have reportedly fed 8,810 families for one month. The supervisor used her knowledge of the agency’s inner workings to get around the system of checks and balances that were in place at the time.

The city of Fort Lauderdale (FL) fails a federal audit for the failure to adequately document how monies dedicated to helping poor people were allocated. The penalty: the city will repay the federal government $2.5 million. The city is accused of sloppy record-keeping, possibly over a 20-year period, a lack of understanding about how federal money must be spent, and a failure to properly training employees. Oddly, I think, the city passed the federal agency’s local office audit, only to fail when the national auditors came to town.

(During the 20 years, the city received some $49 million in this particular grant money; the $2.5 million that was poorly documented represents about 5% of all the monies received over the 20-year period.)

In both cases, a failure of the internal system of monitoring and controls led to the problems. The DCF supervisor theft of funds is clearly fraud – theft is also illegal pretty much all the time. In the case of the city’s sloppiness, this is not fraud according to a director for the city, and I believe that to be truthful.

In the case of the DCF supervisor, the fraud was perpetrated with the intent to deceive for her own gain as well as the gain of others. There was a breach of confidence in her relationship with her employer, the state of Florida. There was a purpose to her actions. What makes her theft more unpalatable is that, literally, she took food out of the mouths of people in need to feed her greed.

In the case of the city, there does not seem to be any intent to deceive; we don’t know for sure if the money was spent according to federal guidelines because sufficient documentation was not done, which was the source of the audit failure. However, based on the article I read, there is no indication that the monies poorly documented did not go to help people in need, it’s just that it wasn’t documented well enough. Very likely, the monies went to where they were determined to be needed.

Should the city have known better? Yes. Will the city pay the penalty for their mistake? Yes. Should the federal agency’s local office audit have caught the problem before the federal audit? Yes.

Did the DCF improve their internal controls and monitoring? Well, we hope so.

For activities to be fraudulent there needs to be purpose and intent. The DCF supervisor purposefully worked around the checks and balances with the intent on stealing something not belonging to her.

Inasmuch as good governance compliance requires adherence to rules and regulations, the city of Fort Lauderdale did not perform their due diligence in understanding the documentation requirements for spending federal money. While there could have been intent to deceive so as to allocate the money for some other uses than what it was intended, that does not seem to be the case.

The city will be penalized for their lack of performance, just like the DCF supervisor will be penalized for what she did.

But don’t think that sloppiness cannot be branded as fraud; as Sarbanes-Oxley informs us, management in public companies must understand the business and the activities of the employees they (directly) supervise. Thus, purposeful, willful negligence can be seen as fraudulent behavior, and private enterprises and government agencies are not exempt from good behavior.

Norman Katz, Katzscan

How to Govern Well

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

For eight of the ten years I’ve lived in my little community, I’ve been an officer and/or board member of our homeowners association. It’s a thankless job which I cannot be paid for, and has, on the average, cost me somewhere between one-half to one full day of weekly productivity across all these years. Now before you label me as a “condo commando”, I can assure you that this board of directors are not “commandos”: we have seen our middle-class community slip to a lower-middle class one due to homeowners who would rather see this place turn into an industrial park than perform the minimum maintenance necessary to maintain some semblance of aesthetic beauty to their homes. It’s quite pathetic, really, at how much we have to fight uncaring, discourteous people who only seem to have contempt for their homes and community.

At one time we needed to hire a private investigator, so I recommended a friend of mine with whom the Association did contract with. Was this business relationship legal? Was it ethical to enter in to?

Legally, there was nothing to stop the Association from contracting with my PI friend; everything was okay per Florida law. But what is legal is not necessarily ethical, so was this relationship ethical? The answer is “yes”, but it’s because how the relationship was entered in to.

I – as a board member and officer (Vice President) – made full disclosure to the rest of the board of directors that the PI I was recommending is a friend of mine. During the interview process with the full board of directors, the first thing the PI brought up – before even being asked – was that he and I were friends. Again, full disclosure was made.

When it came time to vote on whether to use my PI friend’s services, I did not vote, thus establishing (relative) distance from the decision-making process. I was not able to sway any of the board members in their vote, and that would have been both illegal and unethical too. After some discussion, the rest of the board voted to use my friend’s PI services.

What helped to further create distance between me and the final decision is that, as Vice President, I cannot legally bind the Association to a business contract – only the President can do that. Thus, with this distanced being “forced” upon me by Florida law, the process was further safe-guarded against favoritism.

To me it seems pretty easy to be ethical if you apply two simple tests to any situation: full disclosure and relative distance. Yet time and time again, especially with elected leaders, there seems to be a breakdown of ethics as favoritism guarantees spouses, clients, friends, and relatives are handed sweetheart deals and contracts for services and supplies.

It’s easy to know what is legal: laws are written down for us. Granted, the terminology can be difficult to understand, and contradictions & gaps confusing to comprehend, but all in all we see seem to know what’s legal and what’s not.

It seems that ethics are not very well understood unless they are written down. I continually see ethical failures in elected officials and corporate leaders who – given their experience and education – should simply know better.

Any time you stand to benefit from a decision in which you have some input, either direct or indirect, you need to ask yourself if you’ve provided full disclosure of all relationships and are at a relative distance such that you are not swaying the decision one way or another.

Integrity requires a lot of fortitude, and standing on terra firma sometimes means you’re standing alone, but at least you’ll know you’re in good company.

Norman Katz, Katzscan

March Madness 2009 Statistics

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

First, my apologies to any college basketball fans who are thinking this post will be discussing hoops. I get about 15 different business magazines each month; they are a very useful resource for keeping up with what’s going on in the world.

In the March 2009 edition of Inbound Logistics, the top 12 corporate ethics and compliance concerns of executives surveyed were listed. Product Safety & Liability came in at # 6, with Information Security and Financial Integrity last at numbers 11 and 12 respectively. Anti-bribery, Conflicts of interest & gifts, Anti-trust contact with competitors, Mutual Respect, and Records Management beat Product Safety & Liability. Information Security and Financial Integrity was bested by Privacy, Proper use of computers, Export Controls, and Careful Communication.

Hmmmmm … I’m a little more concerned for my own health and safety now, I think.

In the March 30, 2009 edition of Information Week, 400 respondents to the senior management top security priorities survey showed that 35% of respondents are concerned about protecting data from outside hackers, and 18% are concerned about protecting data from unauthorized employee access.

In the April 2009 (well, it’s close enough to March) edition of CSO Magazine, 1000 ex-employees were surveyed about data security: 79% said they took data without their employer’s permission, with 59% admitting outright to stealing data, and 82% said that employers did not perform audits prior to their dismissal. (24% also stated that they had system access after dismissal.)

Okay…..with Information Security and Financial Integrity ranked so low in the area of concerns, and employers more concerned about outside hacks than inside theft (by a 2:1 ratio), is it any wonder that so many employees were able to steal data before and possibly even after their dismissal?

The distribution of intellectual property – customer lists, item prices, suppliers & costs – can cause serious competitive harm to an organization, so much so that it could suffer serious impacts to financial performance.

Protecting an organization from leaking data requires internal and external focus, and I submit that it takes two different groups of talented people to properly address each security vantage point. Protecting the network infrastructure via the use of hardware & software firewalls, anti-virus software, spam monitoring, web site filtering, data copying & transmission prevention, etc., are tasks best left to the folks who are experts in network infrastructure hardware and software. Identifying gaps in business processes and excessive application user rights & roles – especially those that contradict a person’s job description – are best left to business systems analysts and the folks who are in charge of business software application functional administration.

Taking this a step further, I have long wondered why CIO’s (Chief Information Officers) are given responsibilities better designated for CTO’s (Chief Technology Officers). In my opinion, this is an ideal separation of responsibilities. Working separately the CIO and CTO can focus their talents and resources on their individual areas of expertise. Working together, the CIO and CTO – and their respective teams – can ensure that any solution presented for the enterprise satisfies the business need and works within the technology standards established. (And if the right solution requires standards changes or other enhancements, let the right group handle it.)

What do you think readers? Is it better to have a CIO and CTO working together in mutual collaboration, or keep all technology tasks – from network infrastructure to business applications – under one C-level executive?

Norman Katz, Katzscan

The Wrong Kind of Military Sacrifice

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archive.

When most people see the term “military sacrifice” they think of what our service men and women give up in terms of their personal lives, safety, and well-being for the honor of protecting the interests and citizens of the United States and our allies.

Yet some frauds sacrifice our military in ways that could have deadly consequences, and these fraudsters do so for nothing more than financial gain.

In the case of a Miami Beach (FL) man, this twenty-something year old entrepreneur somehow secured government contracts worth tens of millions of dollars to provide ammunition to US troops overseas. Not only was some of this ammunition decades old and effectively not operational, but some of it came from China (not okay with the US military) though it was labeled as coming from Albania (okay with the US military). Can you, readers, imagine the harm and death to US troops using dysfunctional ammunition? Imagine fighting for your life in a combat zone and having your own weapon malfunction — perhaps even causing serious or otherwise life-threatening injury — due to substandard ammunition while someone in the country you are sworn to protect is living the high-life from profiteering off this fraud? Imagine being pinned down and not being able to fight back due to ammunition failure.

In another case, a US military subcontractor manufacturing night-vision goggles was going to outsource production to China strictly for profit purposes. The technology behind the US military’s night-vision goggles is one of the most closely guarded secrets in our arsenal, and yet these folks were going to hand over to China — a well-known Communist country — the plans and details. So much for a key technological advantage our military troops have in nighttime combat. What would have prevented this technology from falling into the hands of the Chinese military, let alone being sold to the militaries of countries and groups truly at odds with the US? And again, US citizens would have profited by sacrificing the lives of our service men and women.

In both cases, the motivation was greed, pure and simple. I don’t know how these people can live with themselves and what examples they are setting for others to follow, but as I recall both of these instances I am seething with anger. Our military forces deserve nothing but the very best: the military cook deserves to use the finest pots and pans and utensils available, and the combat troops worldwide deserve every advantage — food, technology, armaments, defenses, support services, etc. — that can be provided to them.

Fortunately both frauds were caught in time before secrets were revealed and serious harm done. Yet frauds that can ultimately cost lives continue to occur: when military contractors overbill for goods and services, if monies must be diverted from other uses to pay those bills, then the fraud can be more than just about overcharges and billing — the consequences of such frauds can result in injury and death due to underfunding or delays in other critical areas.

Similarly, consumer product frauds risk the health and well-being of the product users. Avoiding quality assurance testing to save money and shipping knowingly bad product puts lives needlessly at risk. What is the cost of a human life? Well, it seems that some organizations have figured out the price, and it looks pretty cheap from my perspective.

Honest mistakes happen all the time, readers, but in this day and age we’ve got more technologies and business practices than ever to help ensure errors are caught and corrected before damage is done. Yet just like at some point in our lives we’ve each got to act our age, at some point an organization has to act its size and get itself together, simply as a matter of course and without being asked to do so. To the executives out there I say this: The life that is ultimately saved may be yours or that of someone close to you.

Norman Katz, Katzscan