Business Leaders' Take on Fraud: Corrosive

Journal of Accountancy, January 2007 | Go to article overview

Business Leaders' Take on Fraud: Corrosive

U.S. giant responds quickly to bid-rigging charges.

Michael G. Cherkasky, president and CEO of Marsh & McLennan Cos. Inc. (MMC), has had a distinguished career as a manager, prosecutor, investigator and trial attorney and spent 16 years in the criminal justice system, including serving as chief of the Investigations Division for the New York County District Attorney's Office. In October 2004, New York Attorney General Eliot Spitzer filed a civil action against Marsh & McLennan, charging it with bid rigging and accepting kickbacks from selected insurers for steering business to them. The company's board of directors acted quickly and within two weeks named Cherkasky as the new CEO. Cherkasky vowed to resolve the legal and regulatory issues and to revamp MMS's business practices. Although there is the potential for litigation by other states, MMC settled with Spitzer in January 2005 for $850 million to be paid over four years.

JofA: What went wrong at MMC to bring forth allegations of bid rigging and kickbacks? Is this a common industry practice, or was it unique to MMC?

Michael G. Cherkasky: I would certainly not call it a common industry practice; the vast majority of business people are honest and ethical. In our case, a small group of individuals put their own interests above those of the company We had paid these individuals for profit, not for service, which was a mistake. Organizations must maintain a delicate balance between encouraging performance and discouraging illegal or unethical conduct to achieve results.

Being a former prosecutor, I've seen companies handle these crises two ways. They can deny the allegations and fight, usually unsuccessfully, in the courtroom, or they can take ownership of their conduct and fix the problem. I can't emphasize it enough; the latter is the only correct choice.

JofA: Did your strong law enforcement background play a role in your being selected as the new head of MMC?

Cherkasky: There is no question that that had much to do with my being named CEO. This company was on the brink of being in real trouble. We initially lost $10 billion in market capitalization. It took us a full year to recover, but now we have turned the corner. That is a lesson that companies should learn from us. The conduct at MMC was not material to the financial statements as a whole, but when it comes to high-profile cases, there is no such thing as "immaterial" fraud. The financial impact to our company was many times that of the alleged illegalities. That is why it is vitally important that organizations have processes and procedures to prevent wrongdoing in the first place. Our business, like most others, is based on trust. The board recognized this critical concept and decided that MMC was going to be as clean as possible. That is the real lesson other organizations can take away from our situation. Great companies have had, and will continue to have, the same kinds of issues. It is how the company reacts that will make the difference.

JofA: How will MMC prevent such conduct in the future?

Cherkasky: Obviously, the first thing is to set the proper tone at the top. Now, everyone in the company knows that we not only expect but demand ethical behavior. We have greatly improved our audit process to ensure that our financial transactions have adequate documentation. We now have a compliance infrastructure that is world-class. We make better use of our internal audit function to test compliance, and we constantly seek ways to improve it.

JofA: Since MMC is a global entity, what fraud issues concern you the most?

Cherkasky: When a company like ours does business globally with countries that are not as regulated as those in the United States, it is important those countries comport with our norms, not the other way around. For example, we know that a common way of getting business in some nations is to pay for it with bribes and kickbacks. …

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