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10 Questions

with David Stulb
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January 3rd, 2008 issue

KURT VINION/THE PRAGUE POST
David Stulb is staying positive as the world makes strides in the global fight against corruption.
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THE STULB FILE

Job title: Global leader, fraud investigation and dispute services, Ernst & Young
Nationality: American
Previous positions: Global partner, business fraud and investigation services, Arthur Andersen; operations officer, Central Intelligence Agency
Education: B.A., political science, College of the Holy Cross; business executive program, INSEAD

Corruption and fraud continue to be problems in the Czech Republic, according to the new Corruption Perceptions Index, published by Transparency International. It ranked the country the 41st most corrupt nation worldwide. David Stulb, a former witness in the Enron scandal in the United States and the global leader of fraud investigation services at Ernst & Young, one of the world’s largest auditors, talks to The Prague Post about moderation in the U.S. market, the upcoming global convergence in accounting standards and how leading a company is like cleaning up New York City.
➊ It’s been five years since the Sarbanes-Oxley Act (SOX) was passed in the wake of U.S. corporate scandals like Enron. How effective has it been in reducing fraud?
It depends on who you talk to. Clearly stakeholders — shareholders, pension funds, institutional investors — and regulators feel that SOX has done a lot of good. At Ernst & Young, we feel we’ve done exactly what we’ve been asked to do. All the Big Four auditors, the whole public accounting profession, had to address these issues in a much more public and transparent way. In most major industries, large companies would say that there has been a benefit in addressing items that in the past probably weren’t addressed as thoroughly as they are now.
➋ How much has SOX discouraged foreign companies from listing in the United States, or encouraged other countries to adopt stricter regulations?
In the U.S., there is now a heightened sensitivity to the competitiveness of their capital markets. This in turn has led to somewhat of a moderation in emphasis on regulatory enforcement. Companies always consider the regulatory burdens associated with their choice of venue for listing, so up until very recently, London or Hong Kong may have looked preferable. In the last few weeks, however, I have seen some press reports that said for the first time in three years New York listings were up over London, which suggests foreign players are coming back into the U.S. capital markets.
So, many people feel that SOX has done its job. But it’s not over; there’s a debate going on in the U.S. Congress as to what role SOX should play in the future.
➌ Has awareness of corporate fraud and the need for increased accountability spread globally?
Post-Enron, everyone thought fraud was a U.S. issue. But today in a number of major markets around the world, prominent companies have been implicated in significant frauds or alleged corruption schemes. European regulators are more focused on enforcement than ever before. We’ve seen major scandals like Parmalat in Italy, Royal Ahold in the Netherlands. While I would prefer not to speak on current matters, the German and British media have both been focused on high-profile situations in their respective countries in recent months.
It’s a global issue, and regulators all over the world are talking to our profession about what we’re doing to help our clients understand and mitigate these risks. Fraud and corruption are simply bad for business. Companies want to grow, keep their employees happy and increase returns for their shareholders. The last thing they want is to have to undertake a major forensic investigation.
➍ When they do call, what’s the next step?
In most cases, we are retained by well-known law firms that help to define the scope of the investigation. This is especially important as most of the issues of interest have both legal and financial reporting aspects. Our findings are then passed on to our clients. In many markets, these clients have disclosure obligations that can be quite rigorous. Failure to comply can incur significant penalties for the company, particularly in markets like the United States.

➎ How about in other markets?

In other markets, public company disclosure rules are not as clear. But now many markets are moving to IFRS (International Financial Reporting Standards). In the U.S. you have the GAAP (Generally Accepted Accounting Principles) standard and many foreign markets have IFRS. So if you’re a French company that’s listed in France and the U.S., as auditors you have two different sets of standards to apply.
Now, with increasing flexibility from U.S. regulators, it may eventually be the case that U.S. companies could choose to use IFRS. The requirement for foreign registrants to reconcile their financial reports to GAAP has already been lifted and more changes look likely to come. We need to be more open-minded as Americans, and that’s why many business executives support a move to a single global set of accounting standards.
➏ Many investigations, like Enron, begin with whistleblowers. Are emerging markets doing enough to protect whistleblowers?
Whistleblowing is happening in markets where in the past it had been socially unacceptable or dangerous. In the 140 markets where we operate, I estimate perhaps 25 percent of them have some form of protection for whistleblowers. It’s clearly an evolving area for many markets as to what rights and protections are afforded to whistleblowers.
I expect whistleblowing is not a prominent area right now in the Czech Republic. It will evolve. Looking at Transparency International’s Global Corruption Barometer for the Czech Republic — the results aren’t very good. The government must be concerned about this.
I experienced a minor bribery situation myself here. I was at a client site and went outside to talk to some cabbies and they said, “We’re not taking you anywhere unless you give us 600 Kč [$32.89].” The same thing used to be common in New York. It’s those little things. If you go back to (former New York mayor) Rudy Giuliani, he made it much nicer for people who lived in New York, fixing the broken windows, reducing petty crime.
It’s the same in corporate behavior. The willingness of senior corporate leadership to speak out publicly against fraudulent or corrupt behavior is critical. This is what we mean by “tone at the top.” If you see management behaving well, that works its way down through an organization. Where corporate leaders have made it clear that certain types of behavior are unacceptable, their companies are likely to have been much more successful in reducing the risk of corruption.
➐ Are either private or public companies more susceptible to fraud or corruption?
The ownership structure of a company is less likely to determine the risk of fraud or corruption than the company’s industry sector. Levels of fraud are often more consistent across a given industry sector. That is, at least until the internal control mechanisms of the companies grow in sophistication to mitigate the risk.
Measuring best practices by market segment is so efficient now that if a company in the telecom industry, for example, sees one of their competitors suffering a major fraud, executives are likely to challenge their internal audit and compliance leaders to be sure that similar vulnerabilities are addressed.
➑ Are there any emerging markets that are making strides in fighting corruption?
It’s no secret that corruption is a major issue for Africa and other emerging markets. I did a lot of interviews in Moscow recently, and there it’s a simple story: There’s nearly $100 billion of excess capital that can’t be worked through their economy, so exporting that capital through acquisitions is essential. Access to foreign markets through initial public offerings or secondary listings can facilitate those acquisitions.
With these capital market activities come additional regulatory obligations, including the need to do a better job in corporate governance and business ethics, which they may not want to do in their markets, but if they want to play in foreign markets they have to. That’s a huge swing for our profession; it’s good news.
➒ You’re currently working on the investigation of Iraq’s former Oil-for-Food program. Can you tell us more about it?
I am the lead engagement partner for Ernst & Young. We were publicly retained initially by the Coalition Provisional Authority and later by the Iraqi government. There were two separate facets to the investigation. One was done by Paul Volcker for the United Nations. Our mandate was much broader than that. Beyond that I can’t comment because it’s an ongoing case.
➓ Any advice you’d give entrepreneurs looking to grow their businesses responsibly?
Entrepreneurs in many ways are more focused on cash flow and employee morale than large institutions, because it’s really their money and their future. It’s good to know where the cash is coming in, and as you grow you need to make sure your infrastructure is sufficient, and that includes internal controls. Be candid with your auditors about your weaknesses, so you have someone looking at the areas that may need extra attention.
If you’re in the service industry and have a large employee base, you need to be honest with those employees. They’re part of your franchise and if they’re not on board, you’re going to have major issues. As the expression goes, your employees are your most important asset.
Want your manager to answer our 10 Questions? Contact Paul Voosen at pvoosen@praguepost.com


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