Spring Midwest IASA Conference · Classification: Internal Use Payday Loan Business Model •...

Classification: Internal Use

Spring Midwest IASA ConferenceAnkeny, Iowa

April 25-26, 2019


Crossing the Ethical Boundary

Insights from a Fraud InvestigatorShauna Woody-Coussens

Managing Director Forensic and Valuation Services

BKD, LLP


Learning Objectives

• Discuss example of individual that crossed ethical boundaries

• Describe a model for ethical decision making• Examine example of evaluating and resolving an

ethical dilemma


Definition of Ethics• Webster’s

– Discipline dealing with what is good and bad and with moral duty and obligation

– Set of moral principles: theory or system of moral values

– Principles of conduct governing individual or group– Guiding philosophy– Consciousness of moral importance

• At its simplest, ethics is a system of moral principals. They affect how people make decisions and lead their lives


Case Study – Scott Tucker

$3.5 billion payday loan business1997-2013More than 4.5 million borrowers impacted


Payday Loan Business Model• Customers are high-risk (previous history of

non-payment)• Only 7 out of 10 will repay, and there is virtually

no recourse• Pricing is about $30 for every $100 advanced.

Loan maturities are approximately 14 days– Tenure at job– Claimed regular income– Established bank account


Payday Loan Business Model• Scaled from $300,000 initial investment in a

single store front in1997 and used Internet to speed things up and make loan process more convenient and efficient through use of online lending software

• Could approve loans in 3/10ths of a second• Use of Internet allowed companies to make

loans to borrowers in states where they did not have a physical presence and that did not allow Payday lending. So, in 2003, a couple of states sued


Tribal Sovereign Immunity

• Tucker entered into business relationships with three Native American tribes to gain the protection of “tribal sovereign immunity”

• State supreme courts in the states that sued ruled that this was permissible

• In a subsequent suit brought by the FTC, it was found that Native American tribes are subject to the FTC Act and that Tucker’s companies violated the Act


Relationships with Native American Tribes

• The processing center operations were located in Overland Park, KS, not OK or NE where the tribes are located. However, employees were told to lie and say they were located in OK or NE if asked

• Tribes received approximately 1%-2% of AMG’s revenue, while 99%-98% was retained by Tucker’s companies

• At least $400 million went directly to Tucker, in part through personal expense and purchases paid out of the tribal entity bank accounts


Scott Tucker’s $400 Million• Money went to support Tucker’s lifestyle:

– Level 5 Racing Team - 4 Porsche and 6 Ferrari automobiles and related racing team assets ($60 million)

– Learjet ($14 million)– High-priced jewelry– Aspen home ($8 million) and a Leawood, KS home

($1.8 million) – Over $200+ million sitting in various bank accounts


Where Did Tucker’s Business Model Go Wrong

• Lending website informed borrower of amount they could borrow based on their claimed income and employment

• Borrowers had to electronically indicate that they had read certain documents online and to preauthorize electronic funds withdrawals from their accounts to repay the loans

• The loan principal was made available the next day via electronic deposit into the borrower’s bank account


Deceptive and Misleading TILA Disclosures

• The Loan Note and Disclosure had to include the TILA box to disclose the cost of the loan in clear and simple terms

• For a $500 loan, the TILA box would indicate finance charges of $150 and a total of payments of $650 – Aside: the loans were for 14 days, so the stated APR

on this loan would be 782.14%


Deceptive and Misleading TILA Disclosures

• However, the actual repayment schedule was as follows:– On the borrower’s payday, the entire amount of the

finance charge was withdrawn, but none was applied to principal unless borrower arranged to pay-off the loan

– This would occur for three more paydays– On the fifth payday, the lender would begin to

withdraw an additional $50 to apply to the principal balance of the loan


Actual Amount Paid on $500 Loan Was $1,925

These figures were not provided to the borrower in any of the documentation

Pmt #5 would often result in a call from the borrower as they expected to pay a total of $650

Payday Withdrawal

Amount Applied to Finance Charge

Amount Applied to Principal

Principal Balance

Remaining1 150$ $ 150 -$ 500$ 2 150 150 0 5003 150 150 0 5004 150 150 0 5005 200 150 50 4506 185 135 50 4007 170 120 50 3508 155 105 50 3009 140 90 50 250

10 125 75 50 20011 110 60 50 15012 95 45 50 10013 80 30 50 5014 65 15 50 0

1,925$ 1,425$ 500$


Borrower Harm

• Borrowers were cash-strapped to begin with• Unauthorized withdrawals would keep them

from paying other obligations and resulted in overdrafts and NSF fees

• Some borrowers actually had to take out additional payday loans to cover their other obligations, worsening their situation


Convictions and Judgments• Criminal case (2013-2018): 16 years 8 months in

federal prison and potential $3.5 billion judgement– Part of reason for length of prison term was his absolute lack of

remorse– This will be Tucker’s second stint in prison. He spent a year in

prison related to a bank fraud scheme and was released in 1992• He also has a $1.3 billion judgement against him

arising from a civil case brought by the FTC. His wife has a $30 million judgement

• Tucker has been charged in Kansas for filing a false tax return that did not reflect more than $100 million that he made through his businesses


How Tucker Saw Himself

• Did Tucker think he had done anything wrong?

• In a letter to the court, Tucker defended his business practices and implied he was merely misunderstood– “Although I saw myself as being an entrepreneur, a jobs

provider, and a contributor to the American economy, I’ve learned that others view me through a different lens. I am very sorry that our leaders castigate me as a villain or some type of predator.”


Another View of Tucker• In the Netflix series “Dirty Money”

– Tucker comes across as arrogant and completely rejects the thought that what he was involved in was wrong. His position was, “It was just a business. There was demand, and consumers and the business was built around that.”

– He was asked, “Do you think you are a moral person?” He hesitated then answered, “I’m a business person.”


Is It a Matter of Business or Ethics?

• Are payday loan operations legal?• Do payday loan operations serve a legitimate purpose?• Do borrowers voluntarily take out loans from payday loan

businesses?• On average, are payday loans riskier than loans made by banks?• Should lenders be rewarded at above average rates for taking

above average risk?• Do borrowers know the interest rate they are being charged?• Can the average payday loan borrower always afford the interest

rates they are charged?• In some cases do payday loan borrowers end up in a worse financial

position than had they not taken out the loan to begin with?• Should payday loan operations be legal?


What About Tucker’s Employees?(Did they act ethically?)

• Did they knowingly lie?• Did they understand how the repayment

schedule worked?• Did they understand the financial and emotional

harm being inflicted on borrowers?• How could they knowingly participate in the

scheme?• Were they all just “bad, unethical people”?


What Causes Unethical Behavior?(Why do “good” people do “bad” things?)

Are actions tied to character or are they situational?Research indicates most of us are capable of behaving in profoundly

unethical ways, and do so without realizing it all the time


Business Vs Ethics

• Ethical Decisions– Is this fair?– Will people be

hurt?

• Business Decisions– What might I gain?– How will it affect the

future?

Researchers indicate our frame of mind makes a difference. We may not always realize we are facing an ethical question


Ethical Decision-Making Process

• Often you may not have all facts and must probe to uncover “right” or best way to respond to a dilemma

• Ethical issues often times involve competing values• Sometimes, there may be more than one “right” answer.

As a professional, you cannot shy away from these gray areas but instead must learn to actively work through them

• Ethical decision-making model, which is a series of evaluation questions to help you analyze and determine best possible solution to an ethical dilemma


Steps in Ethical Decision-Making Model

1. Frame ethical issue2. Gather critical facts3. Consider relevant technical and ethics standards4. Identify stakeholders and obligations5. Identify operational issues and technical issues6. Consider possible alternatives7. Consider effects on stakeholders8. Compare and weigh alternatives9. Decide on a course of action10. Document your efforts11. Reflect on your decisionSource: Ethical Obligations and Decision Making in Accounting, 2nd Edition, Mintz and Morris, ©2011.


1. Frame Ethical Issue

• A frame of reference, or a point of view, refers to the way we look at a given situation

• How a person views a situation can affect his/her understanding of the facts and influence the determination of right from wrong

• Some frames can minimize or even omit the ethical aspects of a decision

• There may be multiple ethical issues – focus on one major one at a time

Presenter

Presentation Notes


Example Ethical Dilemma

I disclosed some negative findings and made associated recommendations in a report. Upon providing draft to client, I was asked to remove or significantly alter some of the major findings

This is an ethical dilemma because there was a conflict between my desire to address the client’s concerns and maintain a good relationship with a significant client, and my obligation to accomplish disclosure of what I believed were legitimate significant findings

The client contact requesting the changes was a member of the client’s legal division. My report was written for the “governing body” of the organization, to whom the client contact reported


2. Gather Critical Facts

• Do not jump to conclusions without the facts• Consider who, what, where, when, how and

why• Facts can be difficult to find because of

uncertainty around the ethical issue• Assemble as many facts as possible before

proceeding• Clarify what assumptions you are making



• One of the primary issues was a potential violation of state law. The finding was technically outside the scope of my engagement, but was discovered by performing in scope procedures

• Client contact indicated board and senior management were aware of issue– Was not wholly accurate

• Client contact was concerned about having issue in writing because regulatory reviewers and public could then be pointed to issue with negative consequences

• Client contact indicated he had no intention of changing the client’s practices to address the potential violation

• Fairly new client for my firm with annual fees in excess of $200,000


3. Consider Applicable Accounting and Ethics StandardsProfessional ethics rules, regulations and laws include those rules of conduct issued by any professional association or society• AICPA• Applicable State Accountancy Boards• Applicable State CPA Societies• Association of Certified Fraud Examiners• Other Regulatory Requirements (GAO, SEC, PCAOB, etc.)

Also consider any organizational policies that impact your decision


4. Identify Stakeholders and Obligations

Identify all of the stakeholders• Who are the primary or direct stakeholders?• Who are the secondary or indirect stakeholders?• Why are they stakeholders for the issue?

– Perspective – try viewing the issue from the perspective of each stakeholder

You should consider as many stakeholders as possible to get a comprehensive picture of who would be affected by your decision



• Stakeholders included– Board/management of the client– Client contact– Client employees implicated in the potential

violation– Outside parties impacted by transactions– Regulators– My firm/partners/me


5. Identify any Operational and Technical Issues

• Are there any operational or technical matters that may be impacted?

• What are the potential hard and soft costs of those impacts?

• What are the magnitude of the impacts and the probability that they will occur?


6. Consider Possible Alternatives

• Start with determining what might be appropriate courses of actions

• For each alternative, consider:– Is it legal?– Is it consistent with professional standards?– Is it consistent with organizational policies?– Is it right?– Is it fair?

• “See Risk, Seek Help”


Example Ethical DilemmaPrimary options considered included:• Option 1 – Remove comments• Option 2 – Water down comments so they are so vague

no one will know what it means• Option 3 – Leave comments in report• Option 4 – Remove comments, but send anonymous

letter to regulatory body


7. Consider Effect on Stakeholders

• Think about positive and negative consequences for parties impacted by the decision– Magnitude of consequences and probability they will

occur– Are consequences different in the short and long

terms


Example Ethical Dilemma• Board/management of the client

– They are ultimately responsible for the activities of the client (good and bad)

• Client contact– He was internal legal who saw his responsibility as protecting the

client

• Client employees implicated in the potential violation– There were potential violations which could result in legal action

and/or termination


Example Ethical Dilemma• Outside parties that might have grounds for

redress– Affected outside parties could potentially initiate legal action

• Regulators– Have responsibility for enforcing regulations/law

• My firm/partners– The stance I chose to take could impact my firm, my colleagues

and myself, both from a reputational and financial stance


8. Compare and Weigh Alternatives Option 1-Remove Comment

If I chose Option 1• Client would be happy• Known compliance problem is potentially withheld

from regulators (and maybe from the board and/or other senior management)

• Denies opportunity for organization to recognize importance of issue and possibly fix problem

• May establish a slippery slope with client by sending message that I/my firm will back down

• Potentially negative impact on me or my organization or potential liability if issue were ever discovered and draft/final reports differ


8. Compare and Weigh Alternatives Option 2-Water Down Comment

If I chose Option 2• This would likely satisfy client and support relationship

with client• Would undermine importance I may see in issue• Does a comment that is watered down actually

accomplish disclosure?• Senior management/board may not understand the

importance of the issue which could lead to more significant issues in the future

• Regulators may criticize me or my firm if they dig into the situation and have a more negative view


8. Compare and Weigh Alternatives Option 3-Leave Comment in Report

If I chose Option 3• Client will be upset• Client may be forced to fix problem• Impacted outside parties may become aware and take

action• Regulators may become aware and take punitive or

remedial action• My firm/partners/I may lose a client or lose additional

opportunities with the client


8. Compare and Weigh Alternatives Option 4-Remove Comment but Send Anon. Letter

If I chose Option 4• Similar impacts as Option 1 regarding client

– Client happy• Regulators find out about issue and may take punitive or

remedial action• Issue may still be hidden from board and other senior

management and problems may continue into the future• I have likely violated client confidentiality

requirements/standards


8. Compare and Weigh AlternativesHow comfortable are you with each option?

You might want to consider how you would feel if you had to discuss your decision in public. Would you be concerned with how it reflects on your ethics?


8. Compare and Weigh AlternativesUnder Options 1 and 2I would know I did not have the nerve to stand my ground and achieve full disclosure of known issues- which is why I was hired in the first placeUnder Option 4I would likely violate client confidentiality. It is sneaky-this is not how I want to treat my clientsUnder Option 3Did I feel I could explain taking this action? Does this feel like a correct decision? Does this fulfill my obligations?


• Although prior steps argue for a purely rational approach to the situation, what does your “Gut Check” tell you

• Intuition is gaining credibility in decision making – knowing something is not “right”– Particularly relevant if you have a lot of experience in

the area

“Gut Check”


9. Make a Decision• Ultimately, the decision is yours and you

should take time needed to try to arrive at the best decision

• And remember…doing nothing isactually a decision

In the example ethical dilemma, I chose Option 3, and left the comment in the report

Presenter

Presentation Notes


10. Document Your EffortsOnce you have made a decision, you should consider documenting it so that you can later remember:• Your understanding of facts at the time• Persons with whom you consulted and their

professional affiliations– In my case, it was my managing partner and the firm’s

chief risk officer• Your basis for your decision

– Documentation reviewed– Notes from discussions– Emails with involved parties

• Some decision require more documentation than others


• Given all the facts and circumstances, did you make an appropriate decision?

• Would you make the same decision again?• Why or why not?

11. Reflect On Your Decision


Questions to Consider• As a professional, do I recognize the importance

of public trust?• Do I know with whom I may consult on ethical

matters?• Do I ensure that I maintain my integrity and am I

objective in performing the work that I do?• Do I evaluate ethical issues fully before deciding

on an appropriate course of action?


Take Aways• Be cognizant of your ethical obligations, codes

of ethics or codes of professional conduct• When evaluating issues, take time to understand

facts, applicable rules and regulations, available options and impact of your actions on various stakeholders

• Don’t go it alone! Seek counsel where necessary

• The decisions you make DO matter!


Final Comments• Employees tend to follow leaders’ cues for both good and

bad, which makes it especially problematic when leaders break rules or violate standards of integrity

• To build strong ethical leadership and/or address deficiencies, emphasize integrity as a requirement for promotions to all levels of leadership, establish ethical leadership as an essential job function and include ethical leadership measures in employee reviews and evaluations

• Recognize that certain misconduct is likely to be a pattern of bad behavior, rather than an isolated incident. When even a single incident occurs, invest the resources necessary to follow the trail and determine whether it is part of a larger, ongoing pattern

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