Hui Chen: Applying DOJ’s Compliance Questions to Supplier/Social Responsibility Auditing

By: Hui Chen, former Compliance Counsel Expert, Fraud Section, Department of Justice

Ed. Note:  Hui Chen gained national attention when she made a “noisy withdrawal” from the Department of Justice this past June.  Afterwards, she graciously agreed to write the following for us.  We applaud her deep commitment to integrity and greatly appreciate her making time to pen this article.

In February 2017, the Fraud Section of the Criminal Division of the Department of Justice (“DOJ”) released a document entitled “Evaluation of Corporate Compliance Programs” (“Evaluation Questions”) which makes public the types of questions the Fraud Sections asks in its evaluation of corporate compliance programs in the context of its criminal investigations. The Evaluation Questions immediately gained the attention and interest of anti-fraud compliance professionals as well as global regulators and law enforcement interested in corporate accountability. The Fraud Section, which prosecutes cases involving foreign corruption, financial,  securities  and healthcare fraud, has brought corporate prosecutions with historic fines and penalties and exerts enormous influence in the those areas of compliance. What is often missed in the narrative, however, is the Fraud Section’s leading role in two of the largest environmental criminal prosecutions in history: the Deepwater Horizon and the VW emission scandal. As the Fraud Section’s Compliance Counsel Expert, I had the privilege of being involved in these cases, and they were very much on my mind as I drafted the Evaluation Questions.

Although the Evaluation Questions are set in the context of criminal investigations, one of the intents of the document is to also provide a framework for companies and compliance professionals to design, implement, and test their compliance programs for effectiveness. That framework is every bit as applicable to EHS and sustainability programs as it is for anti-fraud compliance programs.

At its core, the Evaluation Questions center around the following tenets of effectiveness: credibility, measurements, accountability, and continuous improvement. Let’s briefly explore these principles and see how they apply in the context of supplier/social responsibility auditing.

Credibility

The Evaluation Questions probe the credibility of companies’ boards, senior leadership, and compliance and control functions. It specifically names “audit” as one of the “relevant control functions”. It asks whether “compliance and control personnel ha[ve] the appropriate experience and qualifications for their roles and responsibilities.” How companies define that appropriateness tells a lot about the company. For example, companies that define appropriate experience largely in terms of certifications tend to be less sophisticated: they rely on commercial certification bodies to exercise the judgment and evaluation on their behalf. These types of personnel often do not perform impressively when specific questions involving real experience and expertise are posed to them: i.e. “Explain your sample selection methodology”, “How would you handle specific situations”, “What specific red flags do you look for when you are auditing for X”, etc. In this regard, I find Elm’s Auditor QuickQuiz an intriguing and useful concept and tool. My instinct tells me that this quiz may reveal more about auditors’ competency and judgment than most certifications do.

It is important to note that the notion of credibility, as explored by the Evaluation Questions, goes far beyond experience and qualifications. Corporate and professional credibility comes also in the form of visible commitment, demonstrated conduct, soundness of processes, levels of autonomy, strength of empowerment, and responses to risks, all of which are explored throughout the Evaluation Questions.

Applying these questions to supplier/social responsibility auditing, it means companies need to seriously consider factors more than subject matter expertise and cost of the auditors. Companies need to define auditor competency in terms of independence, judgment, field experience, statistical and analytical sophistication, and interpersonal and intercultural skills. Companies should also examine their auditors’ approach closely, asking specific questions about approach, methodology, and plans to identify and prepare for the types of issues that are likely to arise during the audit process.

Measurements

The Evaluation Questions are rooted in various prior guidance issued by the DOJ and other regulatory agencies and international organizations. The document, however, does bring a very significant new element: the demand for evidence of effectiveness in the form of measurements and data.   Evidence of results is, after all, a foundation to credibility. Not only do the Evaluation Questions ask about “information or metrics” the company collects and uses to help detect misconduct, but also “how has the company measured the effectiveness” of activities such as training and policy implementation. There are many “how” questions such as “How has the company assessed whether…policies and procedures have been effectively implemented?” or “How has the company evaluated the usefulness of …policies and procedures.” Companies that are able to answer these how questions in measurable metrics and data are regarded with far more credibility than those who answer with unsubstantiated adjectives.

Measurement and data are concepts that are expected to be second nature for auditors. What is important for companies is to make sure they work with their supplier/social responsibility auditors to define what to  measure and how. Whether you are auditing for manufacturing quality, environmental compliance, or safety, it is important that you sit down with your auditors to define what satisfaction looks like, and identify ways to measure it.

Accountability

Compliance programs cannot succeed with accountability. This is why the Evaluation Questions are focused on the accountability of both individual players and the company’s systems and processes. Accountability is about clearly defined roles and responsibilities, and visible consequences for words and actions. In line with this emphasis, the Evaluation Questions elevate the inquiry from the traditional “tone from the top” to “conduct at the top”  and ask about “concrete” and “specific” actions. There are questions about whether supervisors are held accountable for failures in oversight and how the companies train relationship managers on their responsibilities in managing third party risks. More importantly, there are questions about the accountability of the company: what happens when “compliance raise[s] concerns or objections”? “Were there prior opportunities to detect the misconduct in question, such as audit reports identifying relevant control failures…” In other words, when issues and risks are identified, how has the company been accountable in addressing and remediating them?

As both an in-house compliance officer and as the DOJ Compliance Counsel Expert, I have seen numerous instances where companies have failed to address audit-identified issues adequately. In the eyes of prosecutors, regulators, and other stakeholders such as investors, this failure speaks volumes about the company’s commitment to accountability and raises serious questions about the company’s operational competency. It reminds me of the TV commercial where the bank security guard tells customers, in the midst of a robbery, that his job is only to notify people when there is a robbery, not to do anything about it. That is why the Evaluation Questions include questions on how audit findings and remediation progress are reported to the management and the board, and how the management and board follow up on such reports. Finding the problem is not the goal: fixing it is.

Continuous Improvement   

Even the best compliance program would become an obsolete compliance program should it not continuously update itself. Everything from business and operational realities to company culture to regulatory and legal requirements changes constantly, and only a persistently self-critical program regularly seeking improvements can remain top of its game. The Evaluation Questions recognize the necessity for continuous improvement, not only in its questions in Section 9 on audit, testing, and updates, but also in how its focus on root cause analysis and risk assessments. Every instances of breach, whether it resulted in actual harm or not, is an opportunity for learning and improvement.

This same principle applies in the supplier/social responsibility auditing process. It is important for companies to ask how their auditors are keeping up with ongoing trends, regulations, audit practices/standards and realities, as well as themselves how they are learning from the audit findings in not just short-term remediation, but long-term improvements in how they manage suppliers.

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Hui Chen may be contacted at www.HuiChenEthics.com

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