Has Deloitte Bought Off Someone Inside Your Organization as they did with Marin County?

What This Article Covers

• How did Deloitte allegedly employ the technique of corrupting a project auditor?
• Why is Deloitte accused of civil racketeering?
• What should companies that hire Deloitte should be concerned with because of this case? 
• What had to happen for this case to be brought against Deloitte?

Background

The fact that Deloitte has major problems implementing SAP has been known to us for some time, and is covered in the post below:

http://www.scmfocus.com/sapprojectmanagement/2010/02/why-deloitte-has-problems-implementing-sap/

However, anyone who spends time reading the case brought by Marin County, CA against Deloitte will find some very concerning issues that all clients which currently have Deloitte working for them on an SAP project,  at the very least, and probably even non-SAP projects should be concerned about.

What Marin County Says About Deloitte’s Practices

Marin maintains that Deloitte is guilty of racketeering and fraud.

Marin County’s suit also names as a defendant Ernest Culver, a former county employee who served as project director. The county alleges that Culver interviewed for jobs at Deloitte and SAP, where he now works in the Public Services division. During that time, Culver “was also approving Deloitte’s deficient work on the project, approving payments, and causing Marin County to enter into new contracts with Deloitte and SAP Public Services.

A Bit About Racketeering

Racketeering is the creation of a problem that the organization then solves. Racketeering was originally only for organized crime, however, it is increasingly used in civil matters. There is a legal debate as to how much private individuals should be able to sue under RICO statutes, however, it should be noted that many of the techniques employed by supposedly legitimate companies, like Deloitte, are essentially copies of what criminal organizations are prosecuted for.

The County also alleged that, after two years of working on the SAP ERP implementation, Deloitte collected over $11 million in fees even though it knew that the SAP system would not meet the County’s requirements.

We estimate, through seeing Deloitte on many projects that the Marin County experience is repeated at many clients across the country. However, most will never sue Deloitte because the individuals that originally selected Deloitte do not want their careers tarnished. Lawsuits in systems implementations occur when failures are so massive that they interfere significantly with the operations of the company. In this case, the original allies of Deloitte within the company have no way to protect the implementation, and have no choice but to go along with the sentiment to make a legal issue of what Deloitte did to them. The depth of problems related to the Deloitte work are documented below:

The system was supposed to automate and simplify Marin County’s finance and HR business processes. Instead, reporting and system functionality are a mess. Marin County hasn’t issued financial statements for the past two fiscal years. It can’t yet reconcile its cash balances.  Nor can it administer payables, receivables, fixed assets and inventories. Pension administration – a key component of public sector finances – has been partially stalled by an inability to extract current information from the databases.

The language in the filing against Deloitte is very strong. In addition to accusing Deloitte of racketeering, they are accusing them of being incompetent.

In its legal filings, Marin County claims that Deloitte botched the implementation project because it “was utterly incapable of providing the County with the necessary expert advice, guidance or leadership”. Marin further alleges that Deloitte had “staffed the project with dozens of neophyte consultants, many of whom lacked even a basic understanding of SAP”

Marin County also accuses SAP of being delinquent in protecting them from Deloitte’s incompetence.

Along with that SAP AG and SAP Services were joined to the complaint as additional parties.  The basis of SAP’s liability, as alleged in the complaint, is that SAP through its partnership with Deloitte knew or should have known of Deloitte’s fraud and continued to give them credibility.

However, Marin County would have known that SAP and Deloitte are so financially linked that SAP will never call out an implementation partner if they are a large consulting firm. This applies to any firm. More on this is at this link.

(also, this loyalty goes both ways, as Accenture has been found guilt of actively assisting SAP in stealing intellectual property from a best of breed vendor. These details came out in a fascinating case which is analyzed in this post.)

What Companies that Hire Deloitte Should Be Concerned With

There are many things to be concerned with when hiring Deloitte or if they are already working for you. However, a major concern highlighted by the Marin County case is that Deloitte may by offering some type of current of future financial consideration to individuals who are responsible for signing off on their work. Deloitte was able to find someone in the Marin County they were able to buy off, who signed off on work that has essentially disabled Marin Country for performing basic finance and HR functions. If Deloitte’s work was not deficient, why would Marin County be in the state that it is in, and how was sign off approved? These are very difficult questions for Deloitte to answer.

Appropriate Protection Against Deloitte’s Influence

If your company currently has hired Deloitte, the question is if Deloitte is doing the same thing to the individuals responsible for signing off on their work. You certainly do not want to be left with low quality work, and with the individual responsible for providing the sign off working at Deloitte in the future. Therefore, reasonable safeguards include the following:

1. Have the work performed by Deloitte evaluated more broadly, and by more individuals.
2. Bring in outside individuals with the background in SAP and similar type projects can be brought in and within a just a few months provide an audit of the work performed by Deloitte. An important caveat is that these individuals must be independent from Deloitte and must not be willing to provide Deloitte with a clean bill of health in return for consulting work, future consideration, etc. Deloitte does not offer direct cash bribes to individuals, their approach is much more subtle. One way to safeguard against this is to require that the independent auditor have no contact with any partner level (partner, director, etc) at Deloitte. As soon as the Deloitte partner learns of the auditor, they will go about attempting to co-opt the auditor by any means at their disposal. Partners at Deloitte are extremely effective manipulators of other people, which is why the auditor should keep a safe distance from the Deloitte partner. In fact, for the purposes of the analysis, there is no reason for the auditor to speak with the partner.

What to Recognize about Deloitte

Conclusion

None of the complaints leveled against Deloitte are surprising to us. Of  the many clients we have worked on with Deloitte, or after Deloitte left, we have yet to see one that was where Deloitte did even an acceptable job. Deloitte cannot add value over a company simply hiring contract resources off of LinkedIn, and they certainly cost considerably more. Also, due to the enormous compensation paid to the partners, (With senior partners making over $2,000,000 a year, the junior partners make much less, the partner structure in all the major consulting firms is very tiered.), hiring Deloitte will guarantee overpaying for every resource over what can be found on the open market in order to transfer the excess payments to the partners. Secondly, Deloitte’s addition to your project significantly decreases its likelihood of success. This extends from the wrong software being selected, to incorrect staffing, etc..

We estimated that there are many cases like the Marin County case, but clients have been too concerned about bad publicity to bring a case against Deloitte. However, what is new about the Marin County case is the allegation in court documents that Deloitte converted an individual inside of Marin Country to essentially an agent of Deloitte. At some point that individual must have known they would not have a place at Marin County, once the deficient work by Deloitte was discovered. In the court documents Marin County accuses Ernest Culver of hiding the benefits he was receiving from Deloitte as well as the future employment discussions that were being undertaken.

Marin initially argues that Culver’s failure to disclose each of the expensive meals provided to him by Deloitte as well as the discussions of potential employment that occurred in the relevant period (October 2006 through April 2007) were material facts that Culver had a duty to disclose to Marin. See, e.g., Huong Que, Inc. v. Luu, 150 Cal. App. 4th 400, 414 (Cal. App. 2007) (“an employee, while employed, owes undivided loyalty to his employer.”). Marin argues that it was entitled to Culver’s “conflict-free judgment” and loyalty during this time and that, instead, because of the undisclosed meals and employment discussions, Culver was acting in Deloitte and SAP’s best interest instead of the County’s.

Therefore the question of great interest is when did Deloitte make it known to their “inside man” that he would have a position which greatly improved his career inside of Deloitte? Given the nature of the work performed by Deloitte, it seems it was very early in the project. However, the dates that the approval for $3 million in extra work, versus Ernest Culver’s move from Marin County to Deloitte looks quite bad for Deloitte. This quote is from the official court documents.

Richard Arrow, and the new Project director into seeking the BOS approval of $3 million in additional fees for Deloitte and SAP, id. ¶ 160; the additional fees were approved by the County on May 1, 2007, id., ¶ 162; and Culver secured employment with SAP in July 2007. Id., ¶ 180.

This is two month difference between approval and Culver moving to Deloitte. A good attorney will subpoena  the expense records of Deloitte for the Marin County project, and will most likely find the inside man’s name on many expensive dinners paid for by Deloitte but expensed to Marin County. Taking a person out to dinner and flattering them, and proposing a great future together, is how the corruption process usually begins. Actually, we guessed how this worked before we read the following paragraph in the county’s claims.

Among the county’s claims is that Culver was “bribed” with lavish meals and job promises.

References

http://www.infoworld.com/d/applications/county-alleges-sap-deloitte-engaged-in-racketeering-272

http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act

http://www.nytimes.com/1988/08/01/us/steep-rise-seen-in-private-use-of-federal-racketeering-law.html?pagewanted=all&src=pm

http://www.backbonemag.com/Backblog/marin-county-v-deloitte-learn-from-this-erp-implementation-failure-to-drive-success.aspx

http://www.r3now.com/sap-project-fraud-allegations-marin-county-v-deloitte-sap

What Do You Think About This? 

I would like to open up the post to comments. Have you witnessed the type of behavior and actions by Deloitte described in the Marin County case in your own company? Are you concerned that Deloitte may have offered financial favors, promises or future employment or other consideration in order to look the other way and sign off on deficient work? 

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