Diligence is Due
Carol Dweck wrote a book on growth mindset many years ago. Her work on psychology of motivation and success is the gold standard in education and organizational development. It is time for us to apply the growth mindset rubric to due diligence (DD) because many recent scandals like FTX, Theranos, and Frank highlight the need for significant improvement.
Sadly, DD service has been severely commoditized and is subject to ever mounting pressure on cost and turnaround time for each project. Instead of statistics to prove my point, I’ll offer an example.
A few months ago, while conducting a fraud investigation, our team stumbled on a pile of due diligence records from a major bank associated with our subject. Turned out the bank’s DD team rubber-stamped a bunch of documents provided by the subject in advance of opening a business account. What was missed is the subject’s obvious effort to impersonate a prominent CEO with the same name.
Why did this happen? Well, a few things come to mind:
- Lack of competence
- High workload and pressure to move each case forward
- Lack of quality control
Of course, mistakes happen. However, the scandals mentioned earlier and many others are pointing to a systemic problem. To summarize this problem, we accept that DD is generally high-volume, pressure-cooker, low-standards service which can neither attract nor retain good talent. Therefore, we have a “you get what you get and you don’t get upset” situation. The only question today is, “What is the cost of poor DD?”. No clear answer here because the “cost” is a combination of reputational damage, regulatory actions, and (no surprise) financial losses. While it may be possible to quantify the first two, the last one alone continues to mount if we monitor current lawsuits, the size of original investments into fraudulent enterprises, and applied penalties. On the reputation front, FTX alone roped in global investment brands, multiple celebrities, and even a sports arena. As a result, DD itself got a huge slap.
So, what’s the solution?
Just like the problem, the solution is complex. Carol Dweck’s work on growth mindset can inform us. Here’s a model to consider:
- Assume that continual improvement in DD is necessary and possible.
- Following step 1, change from accepting status-quo to the principle of “no yet”, where all current DD standards and practices will be subjected to critical analysis and positive transformation. This will require reduction of workloads and redesign of task rubrics along with subsequent quality control to help reduce errors / omissions and improve each deliverable. The risk of slower, more deliberate, and more expensive work should be willingly accepted by clients requesting DD because the faster alternative will cost them a lot more down the line in reputational, regulatory, and financial impact.
- DD should be treated as a profession and taught at both undergraduate and graduate levels with additional investments into ongoing research. Without this, talent will continue to be scarce and DD’s reputation mediocre.
- Partner with organizations like ISO to develop a meaningful standard and coordinate adoption through regulation and industry organizations.
- Begin active re-training of DD practitioners to better enable critical thinking and investigative skills, as well as knowledge of best practices and resources.
For your consideration.
Soar above mediocrity.
