April 2013
Hiring the Boss’s Son

Could a case of nepotism threaten key company initiatives, or pose other threats to organizational well-being?


The internal audit team for Bluetile Financial Services performs the company’s annual conflicts of interest (COI) review as part of its U.S. Sarbanes-Oxley Act of 2002/corporate governance procedures. The review’s scope encompasses a COI survey process executed by Bluetile’s Human Resources department for its nearly 5,000 employees throughout the U.S. 

This year’s review has gone very smoothly, which the vice president of Human Resources, Bill Peoples, attributes to the new workflow system used to collect annual COI certifications from company employees. “You know, the new COI workflow system that Blake Swanson’s firm developed has not only saved us a lot this year in terms of labor, but the reporting it produces is incredible,” Bill told the internal audit team. “I’m excited to see what the next phase of implementation can do for the new employee wellness portal on our website.”

Aaron Bird, the vice president of Internal Audit, thought the workflow-system contractor’s name sounded familiar and asked his team to obtain the contract and related correspondence for review. “Just what I thought,” he told the audit team. “Our new system contractor is the son of the company’s president and chief operating officer.”

A quick check of the team’s workpapers found no disclosure of any such relationship on any of the executives’ annual certifications. “This is such a high profile project that surely those who need to know have been made aware of this and have approved it even if it’s not on the certifications,” Aaron said. He and his team then performed a detailed analysis of the relationship, and everything seemed to be in order:

  • At US $249,000, the contract amount for the first phase of implementation was within the approval authority delegated to Bill in Human Resources, and the contract was executed appropriately.
  • The project appears to have come in on schedule, and perhaps even somewhat under budget.
  • There's nothing alarming about the rates that were agreed to for the project.
  • Everyone seems to be satisfied with the quality of the work performed; plus, the audit team had just heard Bill’s personal endorsement.

Aaron doesn’t want to create problems with these high-profile initiatives, and he always tries to use good judgment to avoid unnecessary nit picking. Sill, he also knows the audit committee is always interested in the results from the COI project.

Should Aaron risk slowing down work on these important projects — and potentially creating ill will among some of the company’s executives — by digging into this relationship further? The chief operating officer will likely just add the disclosure to a new certification form and sign it if asked about the oversight. What will that accomplish? Is anyone likely to reach a different conclusion on the arrangement just because a new certification form is signed and filed?

Share your comments below.

Hiring the Boss's Son
I believe Aaron should dig further into it. Why did the Chief Operating Officer (COO) fail to disclose this initially as he should have done? Is there anything that the COO could be hiding? Why is it that the Audit committee should not be informed of such apparent oversight? The issue needs to looked into further ratrher than swept under the carpet.
Posted By: Vincent Mokwenye
2013-04-04 8:34 AM
Don't Settle For Less
Shareholders and stakeholders demand transparency! Since this relationship lacks independence in fact, and because the board relies on the results therein, it should be given further consideration. Even if all that happens is that it's disclosed on a new certification form, at least the information is out there. As an auditor, if we ever feel something is out of place, it is our duty to pursue it.
Posted By: Kenny Schneider
2013-04-04 8:32 AM


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