by Tom Hanlon
“You will all be in corporate governance roles,” R. Trent Gazzaway told accounting students at a recent Department of Accountancy Lyceum in the Deloitte Auditorium. “Whether you are a CFO of a company or a tax auditor or on a board of directors for a for-profit organization or a not-for-profit organization, you will be in a governance role.”
And those governance roles have never been more challenging or rewarding, said Gazzaway, who is national managing partner of audit services for Grant Thornton. The stake are high, and the best-intentioned people find themselves in the direst of straits if they don’t respond correctly to the ethical dilemmas that inevitably crop up in governing corporations.
“What you don’t know can hurt you,” Gazzaway said. “You need to stop and think about what’s the right way to act. Think through the issue in rational fashion.” Those in governance roles, Gazzaway said, need to take Ronald Reagan’s stance regarding U.S. relations with the Soviet Union: Trust, but verify. Trust that things are going the way they should – but verify that that is, indeed, the case.
“If you choose to be part of a board, you have to cross the trust threshold with management,” Gazzaway said. But that element of trust doesn’t mean you operate with blinders on, he added. “You can’t let the wheels fall off before you move in to fix a problem. You need to be proactive and have a healthy skepticism.”
Gazzaway used Fannie Mae – the Federal National Mortgage Association – as a case in point for what happens when you move in too late to fix a problem. “Fannie Mae was the second largest financial institution in the U.S.,” said Gazzaway, who in 2005 and 2008 was named by Treasury & Risk Management as one of the 100 most influential people in finance, and who was named the 2008 Auditor of the Year by the Institutional Investor’s Compliance Reporter. “It went from being a government-sponsored entity to a government-owned entity.”
The Fannie Mae scandal officially began in 2004, when widespread accounting errors were reported, spurring an investigation, but the wheels began to wobble far earlier: In 2000, the House Banking Subcommittee On Capital Markets, Securities and Government-Sponsored Enterprises held hearings on Fannie Mae regarding its business and accounting practices.
Daniel Mudd, CEO and president of Fannie Mae from 2005-2008, and chief operating officer for the corporation from 2000-2004, testified regarding Fannie Mae on Capitol Hill: “I understood there were issues in the culture, that there were management issues along the way…. But I never had any indications that it would lead to the type of problems that have now come to light.” Mudd later was charged by the Securities Exchange Commission with securities fraud.
“No one starts out wanting to get on a slippery slope,” said Gazzaway. “No one starts out to commit fraud.” It starts, he said, with minor instances of malfeasance. If not caught and corrected, those minor instances begin to stack up and turn into bigger instances, more serious ethical and legal wrongdoings. These often add up to hearings, trials, convictions, public shame, and jail time.
Gazzaway shared a few quotes from HealthSouth executives who were caught in an accounting scandal in 2003. The scandal involved falsely inflating the company’s earnings by $1.4 billion, and the selling of $75 million in stock by then-CEO Richard Scrushy several days before the company posted a large loss. Two former vice-presidents said: “I believed what we were doing was temporary,” and “When I realized something was wrong, I understood I should have come forward. But in the situation I was in, I felt trapped.”
Gazzaways’ point was simple: Don’t let yourself get trapped. “You have to walk the walk, not just talk the talk,” he said. “You need to become an agent of change or find a new organization if your company is not walking the walk.”
Gazzaway has filled many roles in his career with Grant Thornton. He has audited public and private companies, assisted companies in improving and evaluating their internal control systems, and served as the firm’s national managing partner of public policy and corporate governance. In addition, he is one of four steering committee chairmen who led the development of the Open Compliance and Ethics Group’s framework for integrating governance, risk management, and compliance into business processes.
“One of my favorite things to do is to give these presentations,” he told the students. “I like to reflect on my career and think about what are some of the things I wish people had told me when I was sitting where you’re sitting. I like to give lessons from my own career that can help you.”
Some of those lessons, he continued, involved committing the time and energy you need to be effective. “You need to surround yourself with the right people, the right processes, and the right technology,” he said. And, he added, if you are on a board of directors, you need to have the backbone to ask the difficult questions. “The board is not there to manage the business, but to make sure that management is effectively running the business. They’ve got to know what questions to ask, and not shy away from asking them.”
When asked what to expect initially, Gazzaway said, “Your first year out of college is a whirlwind. It takes a while to get used to the environment. There’s a lot going on in that first year, a lot to learn, a lot to adapt to. But the stress of that first year passes and you get more comfortable. Your next progression will be moving up to where you supervise people. Learning how to do this will make you successful.”
But that success, he added, will not last without that backbone and that commitment to be as ethical as you are hard-working.