Conflict of interest is a curious topic. I often travel about teaching 2 CFR 200 Uniform Guidance and conflict of interest is always a discussion item. When I ask for a definition of what a conflict of interest is I often get …”a conflict of interest is when [insert your example here]”, but I never really get a definition. We all think we know what it is and the examples are long – purchasing officer gave the contract to his friend; as auditors we can’t audit the areas we previously worked in; the Board told us to hire someone specific.
How about this? A conflict of interest is a situation where undue influence is asserted over decision making. Hmmm, let’s think about that.
Anywhere there is the power to influence the outcome of a decision; there is a conflict of interest. This is true whether the decision is a hiring decision, a procurement decision, or an operations decision. An appearance of a conflict of interest is where there appears to be undue influence which may affect the decision.
I believe there are three fundamental conflicts of interest, which ultimately revolve around money. In reality there are many more types of conflicts of interest, but no one really cares because the impact is minimal. For example, your sister opened a burger stand and for lunch at least once a week you recommend to your colleagues that you all have lunch there. Are you trying to influence your colleagues to eat at your sister’s restaurant? Yes. Does everyone know it? Yes. Does anyone care? Not really. They understand how proud you are of your little sister and that you want her to be successful. Now, if you are responsible for hiring a vendor for a team lunch or client meeting and you use your sister’s restaurant, folks may become concerned. Why? Because as employees and managers we should be good stewards of our organization’s funds.
The first fundamental conflict of interest is procurement. This is the one which is usually at the forefront of the conflict of interest discussion. Was there any undue influence in the award of a contract? While this is the most discussed, it is hard to apply any hard and fast rules as to what constitutes a conflict of interest. Why, you might wonder. Because of the vast number of variables surrounding each procurement. In government procurement, most agencies have internal controls in place to avoid most conflicts of interest. Employees and Board members sign conflicts of interest statements and take annual training. The actual procurement process involves segregation of duties, two-to-three person evaluation panels, and a procurement specialist to ensure all the internal controls are followed. This process will eliminate most conflict of interest scenarios, such as writing the scope for a specific person, service, or product, trying to steer the award to a specific firm and cost inflation.
Let’s talk about the appearance of a conflict in this situation. What if a procurement is awarded to Company X, which is owned by a Board member’s brother? Is this an actual or an appearance of a conflict? It depends on the situation. In a large city where there are several firms — not just Company X — this may very well be a conflict. But what if the Board member recused himself from the discussions and vote on this procurement? Then maybe Company X was just the best value. Consider a small town where Company X was awarded the contract. It could be that Company X is the only company for 100 miles that can perform the work or provide the service. As auditors, we must look at all the variables, and then use substantive documentation and professional judgment to make a decision.
Human Resources is the second most prominent area of fundamental conflicts of interest. In government agencies, some of this is inherently political. That’s why it is called a political appointee. However, internal and external politics can unduly influence hiring and firing decisions. Reduction in Force (RIF) typically falls more into the operational category, so that will be addressed momentarily. While the appearance of a conflict is often easy to see, conflicts of interest in human resources decisions are much harder to identify and substantiate.
The problem with human resources conflicts of interest is when you know someone, how they work, and their competencies, it can often cloud your independence and judgment concerning other candidates. Humans compare what they know with what they don’t. This is how most people make competent decisions. Therefore, there is an innate bias in the decision making before the hiring process has even started — whether the person you think is perfect for the job applies or not.
Writing job descriptions based on need and position justifications based on the strategic plan or division objectives show the organization has internal controls to limit human resources conflicts of interest. Managers and interview panelists who recuse themselves when they cannot be objective about all the candidates shows the agency’s commitment to conflict of interest-free human resources decisions.
However, that does not mean there are not pockets within the organization that are not suffering from favoritism. Favoritism is the biggest conflict of interest in this category. Favoritism depletes morale, reduces productivity, results in poor work products, and is often identified by high turnover in an area. Favoritism can be documented through surveys, interviews, competency evaluations, and comparison of skill sets among candidates. These audits are harder to document and take time to do right.
Operations is the last of the fundamental conflicts of interest area, and garners little interest because it is often masked by the trauma of a larger event. This is seen more frequently in large agencies where huge portions of the agency are segmented, usually by legislative mandate. When the governing legislature cuts significant portions or programming or funding, agencies are forced to significantly reduce costs and often staff. While some of the resulting RIF may be purely driven by funding and programmatic cuts, there is almost always some politics involved.
Executive and senior management must make hard decisions based on the work product, work ethic, skills, and capabilities of existing staff and whether those skills can translate into other areas. During this chaotic time and even for a period of time after the traumatic event, it would be difficult for an auditor to spot a conflict of interest versus political manipulation. Neither is good for employee morale or loyalty, only the conflict of interest is indicative of possible deeper internal control issues.
When evaluating whether there is a real or appearance of a conflict of interest, I encourage every auditor to review conflict of interest statements and training of the organization as well as any specific disclosures for the area under review. This gives the auditor an idea of how rigorous the organization is about managing conflicts of interest and encouraging fair and objective decision making. What do you think? Are there other fundamental conflict of interest areas government auditors should be concerned about?
About the Author
Mara Ash, CIA, CGAP, CGFM, CMRA, is a federal compliance specialist whose career has spanned federal, state, and local governments as well as private industry. Her goal is to help organizations improve service delivery, ensure compliance, and enhance transparency.
She is an active member of The IIA and the Association of Government Accountants, where she has held various leadership positions.