Interview With Susan Mangiero, PhD About Fraud Prevention

As a forensic economist, I have worked on multiple matters relating to the quality of fiduciary practices provided by investment stewards. Sometimes, fraud is involved. Unfortunately, the statistics about fraud are not good. According to the 2014 Report to the Nations, published by the Association of Certified Fraud Examiners ("ACFE"), "the typical organization loses 5% of revenues each year to fraud" or about $3.7 trillion - roughly "22 days worth of trading on the New York Stock Exchange."

Last fall, I pursued and earned the designation of Certified Fraud Examiner. I had to meet an experiential requirement and successfully complete a series of rigorous exams. Click to read the press release and learn about the designation.

A few weeks ago, to my delight, I was asked for an interview by the ACFE. The result is a just-published Question and Answer profile entitled "Susan Mangiero: Take Pride in Curiosity." During the interview, I talked about trust and the value of maintaining a good reputation. Specifically, I described a situation that involved a trader who had backtracked on several deals. After news got out, few persons understandably wanted to deal with him.

Having a good reputation in business, especially financial services, is still important. In recent years, I have been asked to quantify the economic relationship between reputation and the ability for a firm to generate revenue based on the trust factor. Feeling comfortable with an advisor, consultant, banker or asset manager is paramount for an institutional investor who is obliged to carefully select and monitor a third party service provider.

Coincidentally, the CFA Institute just released its study entitled "From Trust to Loyalty: A Global Survey of What Investors Want." In its "Key Insights" section, the point is made that performance and ethical conduct are both important, with investment managers needing to demonstrate that they have gone beyond "adherence to mandatory codes of conduct." This makes sense. Governance is seldom a "check off the box" exercise. (As an aside, I am proud to say that I am a CFA® charterholder."

With the investment community abuzz about the U.S. Department of Labor's proposed Conflict of Interest Rule and its international regulatory equivalents, transparency, ethics and performance issues will no doubt remain high priorities for investors.

Pension Funds and Performance Standards

David Spaulding, founder of the eponymous Spaulding Group, provokes readers with his suggestion that pension plans become "GIPS" compliant. Said differently, his thought is that users of information provided about retirement plan financial health would benefit if reported numbers reflect the Global Investment Performance Standards. Just an aside, states that "The GIPS standards are voluntary and are based on the fundamental principles of full disclosure and fair representation of investment performance results."

I have long maintained the need for more uniformity and clarity about how pension plan numbers are shared with the outside world. Absent fraud, there can be a huge discrepancy between what someone reads on the printed page and the true economic risks associated with any given scheme. Take a look at "The Plan That Didn't Bark: To solve the mystery of benefit plans, analysts must learn to think like detectives" by Susan Mangiero, CFA Magazine, March-April 2008.

I applaud Dave for reminding his blog readers that the standards exist "to provide an ethical framework for asset managers to provide their past performance to prospective clients." He adds that pension funds that expend time and money on a "GIPS" effort stand to "get their shop in order" by being forced to establish policies, procedures and controls. However, he adds that plan sponsors will still need to document how they are doing so I am a bit unclear as to the role of GIPS for pension plans and have asked Mr. Spaulding for further clarification about his ideas.In the meantime, click to read "Pension funds and GIPS" at Investment Performance Guy, April 20, 2011.