United States: Laurel Gift Published "Lessons In Ethics And Compliance: March Madness Or March To Readiness"

The federal indictments and subsequent release of investigative materials relating to corruption in college basketball should alert every university, and many businesses, to the importance of operating strong ethics and compliance programs and conducting internal investigations at the first sign of trouble. Waiting for trouble is madness, but making ready is exercising sound business sense.

In September 2017, federal prosecutors in New York announced charges of fraud and corruption against 10 individuals arising from an alleged conspiracy in which basketball coaches from several Division I universities worked with outside interests to funnel money to recruits in order to entice them to play for their programs. The first major response to the charges occurred when the University of Louisville fired Athletic Director Tom Jurich and legendary Head Basketball Coach Rick Pitino due to their involvement in the alleged scheme. In November, a federal grand jury in New York indicted eight of the ten men arrested in September. In February, a United States District Court Judge denied motions to dismiss charges against several of the co-conspirators.

News outlets have recently published documents from the investigation that show possible NCAA rules violations by more than 20 Division 1 teams. According to the investigative documents, the rules violations involve potentially impermissible benefits and preferential treatment for players and families. The documents may implicate coaches, active and former college basketball players, and sports marketing executives and financial advisors in discussing and directing payments to players and athletic staff.

These revelations demonstrate the depth of potential corruption, point to systemic breaches of established compliance programs, and call into question the ethics of entire university and sports institutions. Organizational readiness could have insulated players and universities from scandal, but instead March Madness of a different sort followed.

Businesses and universities should view the college basketball scandal as a cautionary tale and take a careful look at three moments in time within their own organizations. First, prior to a problem, how is the entity actively engaged in fostering a culture of compliance and strong business ethics? Second, at the very first sign of trouble, how is the entity positioned to respond? Finally, once scandal erupts, is the entity situated to heal with strength or does it fail under pressure?

Every company should ensure readiness by examining its own culture and compliance efforts in order to avoid scandal. Tone at the top matters and was likely the motivating force behind University of Louisville's immediate personnel changes. Tone at the top is set and enforced by ethics and compliance programs that apply equally to all members of the organization.

An effective ethics and compliance program is comprised of: (1) a clear code of conduct; (2) effective internal controls; and (3) regular training mandated for all members of the organization. The code of conduct sets expectations. Internal controls regulate and monitor behavior. Training ensures that everyone understands the rules, the conduct expected, and the consequences.

As demonstrated by the indictments and recently released documents, the alleged crimes were knowingly committed by people familiar with the strict NCAA regulations relating to payment to recruits. In this instance, simply providing education or training concerning industry regulations is not enough. The fraud schemes were complex and involved multiple individuals internal and external to the entities involved. Strong internal controls such as auditing and monitoring are therefore critical and may have assisted in identifying the fraudulent invoices and other practices employed by the participants.

There may have also been warning signs along the way or personnel with knowledge of the scheme who did not feel empowered to act. An effective code of conduct sets expectations with respect to reporting obligations and provides safe methods to report misconduct, such as an ethics hotline.

If misconduct is reported, the organization must be poised to respond in a decisive and timely manner. When the FBI investigation began in 2017, what were the universities and businesses doing to respond? As late as February 2018, the board of regents of at least one major university was still holding internal discussions about how to best react.

Timely action aids in developing an overall culture of ethics and compliance because it establishes for all employees both a mechanism to address wrongdoing and a demonstration that such behavior will not be tolerated. Using the additional tool of quickly performing a well-respected internal investigation can root out problems, prevent further scandal, and enable an organization to heal, which is well worth the cost and potential for disruption.

If history has taught us anything, it is that giving unsupervised responsibility for following the rules to those facing tremendous pressure to produce winning results on the court and in business, entices many to bend or ignore the rules. The solution is a robust and effective ethics and compliance program with adequate resources for implementation and monitoring.

Previously published in the FOCUS Quarterly Newsletter of ACC Western Pennsylvania.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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