ContributorsMulti-process HRSourcing

HRO Is Corporate Responsibility

The newest trends in corporate management all focus on corporate accountability, responsibility, and ethics…legacies of the Enron, Tyco, HealthSouth, Arthur Andersen, Parmalat, CSFB, and Adelphia scandals. As it turns out, outsourcing, specifically HRO, FAO, and other forms of BPO, would have made these scandals nearly impossible.

by Harry Feinberg

There is a new C-title out there: CRO, for Corporate Responsibility Officer. A quick Google search will tell you that Chiquita Brands named Jeffrey Zalla to be its corporate responsibility officer. Avon has Kathleen Walas. IBM has one. So do BP, Wal-Mart, Chevron and McDonald’s.

This title did not just appear out of thin air. It came about to address an existing market reality. Stakeholders want accountability. By stakeholders, we mean customers, employees, vendors, creditors, stockholders, government and the media. And for large companies, there has to be one throat to choke. That’s why Sarbanes-Oxley requires CFOs and CEOs of public companies actually sign off on their periodic financial statements. The signatures are the equivalent of a personal guarantee, just like when you borrow money at the bank.

And remember, Sarbanes-Oxley was passed in 2002 on the heels of Enron’s catastrophic failure in October 2001. Enron also took down Arthur Andersen, one of the Big Six CPA firms, which was supposed to be accountable for Enron’s results. The fact that nearly $40 billion was missing when Enron failed was deemed to be AA’s fault. Nobody was accountable. Nobody took responsibility to call foul on Enron’s crooked CFO, Andrew Fastow. And that is how the CRO came to be.

We at Outsourcing Today have a theory. Many scandals could have been avoided if those companies had outsourced their processes in finance, HR, procurement, facilities, etc. In Enron’s case, there are some great examples of how the activities leading to its failure would have been made impossible. With HRO and FAO, Enron and Arthur Andersen might very well still be around today, prospering. Consider these examples:

Andrew Fastow, Enron’s CFO, famously created off-balance sheet entities, some known as LJM and the Raptors, to hide both debt and losses from Enron shareholders. In and of themselves, these “special purpose entities” were not illegal and in fact were blessed by the SEC. However, Enron’s CFO and his sock puppet treasurer Ben Glisan were able to manipulate the AP and AR going out of and coming into these entities. Had these functions associated with the Raptors been outsourced to a major FAO provider, this manipulation would have been flagged and stopped. Outsourcing providers must be transparent because if their reputation is soiled, they go out of business.

Enron’s three non-energy-trading units—Retail, Broadband, and Azurix (Water)—all suffered enormous losses in their first years of operations. The management of each of these units, having very little accountability to a CRO (a title unknown at the time), were able to hide the losses by covering them with reserves or transferring them to a Raptor. HR leaders would transfer workers and their compensation, on paper, from the money-losing units. If an HRO provider had been involved, the transfers would have triggered the provider’s alarm. Finance leaders routinely were encouraged to hide losses in one of Fastow’s off-balance sheet “securitizations,” which are bundles of assets just like a home loan, sold to third-party investors. If an FAO provider had been involved, the provider’s internal controls would not have allowed such loss-transfer tricks.

The reason that Arthur Andersen was found liable (a verdict later overturned) and forced to liquidate was that it destroyed documents related to Enron. At that point in AA’s saga, its lead partners on the Enron account were, in reality, no longer independent because they were paid so handsomely by Enron. Since then, all outsourcing providers know that the price of corruption is a death sentence.

In fact, many of the largest HRO and FAO firms now have CROs, in one of many different titles such as chief compliance officer, ethics officer, risk officer, audit officer, governance officer, internal controls, assurance officer, and privacy officer. Some titles are in HR, some in finance, some in legal, and some in the office of the CEO. While you are thinking about it, ask your outsourcing provider who fills these shoes at their company. HROs and FAOs have CROs too.

Tags: Contributors, Multi-process HR, Sourcing

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