Fraud: avoiding the Enron snares. (Management).

"Sir, Enron robbed the bank, Arthur Andersen provided the get-away car, and they say you were at the wheel!" Sounds like it could be the opening line of the latest John Grisham novel.

The punch line was actually delivered by the chairman of one of the multitude of U.S. congressional subcommittees currently investigating the Enron debacle, and was directed at the Arthur Andersen partner in charge of the Enron audit.

Of course, the saga does not start and end there. In what surely will be a Hollywood blockbuster, we have the suicide of a former Enron executive, document shredding at Andersen and Enron, links to the White House, and thousands of employees who lost their jobs and life savings. But what is all this drama likely to mean to you, the club manager, in your dealings with your members and the board? After all, your club is a far cry from the energy trading markets of Houston and the wheeling-dealing world of corporate finance with all its opportunity for fraud and abuse of resources. Think so? Think again!

If you believe the size of your club means you will not fall prey to an Enron-esque event, consider some of the interesting facts highlighted by the most recent fraud survey from the Association of Certified Fraud Examiners. The group's 2002 Report to the Nation drew the following conclusions regarding occupational fraud and abuse:

Forty-nine percent of all frauds occur in organizations with fewer than 100 employees and cause average losses of $127,500 per scheme--over $30,000 more than those in large companies. How many clubs have less than 100 employees? Consider also the finding that managers and executives perpetrated frauds that caused losses three and one-half times greater than that caused by regular employees. How many managers and executives are reading this article?

Finally, half of all fraud schemes were committed by individuals between the ages of 36 and 50. How many managers or assistant managers fall into that bracket? Clearly, the statistics indicate that club managers must endeavor to prevent fraud and abuse at their facility.

So, how do your ensure your club does not implode to become the Enron of the club world? Most club managers have attended seminars at some stage of their career where accountants have lectured them on such wonderful fraud prevention techniques as segregation of duties or cash lock-boxes. While all the points covered at such classes remain salient, Enron has taken us to a whole new level. It is corporate governance that likely will become the buzzword around the nation's club board tables for the foreseeable future. Board members, more than ever, will be aware of the fiduciary responsibilities they owe their club and will be looking to their chief executive--you, the general manager--for help in meeting those responsibilities.

Whenever I conduct club fraud or internal control seminars for managers and controllers, I always emphasize the overwhelming importance of the overall control environment of the club. It is an exercise in futility for a club manager to lecture staff and employees on the importance of controls if the tone at the top of the club is not set properly. That tone has to be set by the board, its committees, and the general manager.

The overall control environment comprises:

* Integrity and ethical values; an overall commitment to competence;

* A specified level of board of governors or audit committee participation;

* Management's philosophy and operating style;

* The organizational structure;

* The assignment of authority and responsibility; and,

* Human resource policies and practices.

Regardless of all the finger-pointing that continues to exist in the Enron case, it is clear that somewhere along the line, a lot of people with varying interests lost sight of their ethical responsibilities. A strong overall control environment is any club's first line of defense in fraud prevention, and it is the ethical component of this environment on which the remainder of this article shall focus.

What are business ethics? Simply put, ethics involves learning what is right or wrong, and then doing the right thing. Of course the right thing is not nearly as clear-cut as conveyed in much of the business ethics literature. Most ethical dilemmas in a club are not simply a matter of "Should the waiter steal from the kitchen?" or "Should the controller lie to the board?"

The topic of business ethics often provokes feelings of cynicism, righteousness, paranoia, and even laughter. Not surprisingly, many business leaders liken business ethics to religion because it seems to contain a great deal of preaching. Or they believe it to be redundant as it merely asserts the obvious: Do the right thing! Certainly, it ought to be fairly easy to choose between right and wrong by relying on principles, but business management often demands that we select from alternatives that are neither wholly-right nor wholly-wrong.

Ethics are the fundamental ground rules by which we live our lives. Attention to business ethics is critical during times of fundamental change--such as those faced by clubs right now. Without ethics, there is no clear moral compass to guide managers through complex dilemmas about the right thing to do.

Ethics have always been an inherently crucial part of club management, and the Club Managers Association of America (CMAA) stresses the importance of ethical management throughout its training programs and certification process. But how does the manager ensure his or her ethics permeate the decision-making processes of their club?

CMAA provides a very useful "Test of Compliance" for managers when they face an ethical conflict. Whenever you make a major decision, can you answer yes to these three questions?

1.) Could I announce this decision to the membership at the club's annual meeting?

2.) Could I announce this decision to other club managers at the World Conference?

3.) Would this decision meet with the approval of business professionals?

Today, clubs can manage ethics in the workplace using codes of ethics (a definitive list of the ethical rules of the club), codes of conduct (specific actions in the workplace to implement the code of ethics), ethics committees (or audit committees with well-defined charters), and policy and procedure manuals. Whether only some or all of these are implemented, the true benefit comes from the process of designing such tools. Only through involved discussions with their board and key staff can club managers hope to develop workable ethical management programs that are embraced throughout the club. A pro forma set of codes that may as well be written on stone tablets and viewed as a quaint idea will do nothing to further ethical practices in the club and could even damage a manager's ability to implement his or her ethics program.

Clubs that successfully design, introduce, and monitor an ethics program will benefit from a clear vision of integrity throughout the club. That vision will be owned and embodied by boards and top management over time, and a reward system that is aligned with that vision of integrity will be a natural result of the program. Polices and practices will be aligned with the vision so no mixed signals are sent to employees. Ultimately, the board, management, and the members will have a clear understanding that every significant management decision has ethical dimensions.

Ethics programs simply will not be effective if they do not have the full support of the general manager and the board. We are finding more and more of our club clients approaching us for help with elements of their overall control environment, including the consideration of ethical practices. The issues being raised range from designing audit committee charters to reviewing, from a fraud and ethical perspective, existing management practices.

How does your club stack up? Consider some of these questions that we have been asked to review:

* Does your club have an audit committee?

* Does the audit committee have a written charter clearly defining responsibilities and duties?

* Are you satisfied that there is transparency in your club's financial reporting to you, to the board, and to the membership?

* Are adequate resources devoted to achieving such transparency?

* Are your competitive bidding processes properly conducted to ensure that quality as well as price is taken into account for all the club product and service purchases?

* Do your employees believe a cost/benefit analysis is being applied to ethical issues (i.e., a little theft is O.K.)?

* Have decision-makers on the board and committees disclosed all conflicts of interest or potential conflicts?

* Have such decision makers excused themselves from the bidding process when their close friend, colleague, or business associate is applying for the contract?

* Are your hiring practices free from bias of any kind, including nepotism?

* What are you doing to ensure adherence to your club's code of ethics?

The list is far from exhaustive, but clearly shows the concerns that many club board members are now raising with their general manager and fellow board members. These issues are the cornerstones upon which fraud prevention and detection at any club must be built. Just take a look at the "Q & A Forum" on the CMAA website and count the number of postings regarding the question "Do children of members work at your club?"

One manager had problems motivating some of his department heads because his children worked for them and did not perform satisfactorily. The department heads felt they could not fire or discipline them. How was the manager able to objectively supervise and review the department heads? He may have truly felt he could separate the two issues, but perception is reality. It is unclear why the manager allowed himself to be backed into such a corner. It did not need to happen and should not have happened. A well-crafted code of ethics would have guided the manager to avoid the pitfalls of such scenarios.

The final scene of the Enron saga is yet to be shot. Maybe it will recreate the famous scene from the 1980's movie Wall Street, where we learned that "Greed is good. Greed is right. Greed works." Or perhaps it will take up the comments of one investigator who noted, "The trouble with Enron is that there is no sex. How can you have a scandal this size without sex?" Somehow I am sure that by the time the story hits the silver screen there will be a part for Brad Pitt or Catherine Zeta-Jones. But until then, we will have to sit back with our popcorn and wait, safe in the knowledge that club managers are continuing to promote and develop ethical standards throughout their industry and their clubs.

Philip Newman, CPA, is the audit director responsible for club assurance services in the Washington office of PKF. PKF is an international association of tax, accounting, and consulting firms that has specialized in serving clubs for more than 75 years. Newman can be reached at [e-mail].