IT`s year of shame

Whether it was HP`s spying scandal that caught your attention or the lockdown of Verizon`s Johannesburg offices thanks to Internet Solutions, the recurring theme in these stories is they are grabbing headlines and our international counterparts - seeing big names fall in their wake.

Nevertheless, Continuity SA MD Allen Smith notes that these high-profile cases do not necessarily indicate that companies and their directors are less scrupulous than before, but rather that business is undergoing a culture change and those that misstep are being held up as an example to others.

THE HP WAY

For years, "the HP way" was synonymous with ethical business practice steeped in good corporate governance and responsible global citizenship. However, its image was somewhat clouded this year.

Dating back to ex-CEO Carly Fiorina`s departure from the company, the HP scandal revolves around two investigations - code-named Kona 1 and 2 respectively - into executive boardroom leaks.

Speaking to the sub-committee on investigations for the US house committee on energy and commerce, HP`s recently - and forcibly - retired chairman Patricia Dunn explained in a 33-page document that one of her first actions as company chairman was to investigate board-level leaks to the media which were causing considerable conflict among directors.

Although the first investigation did not yield material evidence of wrongdoing, the second investigation in January this year exposed director George Keyworth as the leak.

Of course these investigations could be considered standard business practice for large corporates; however, it is the manner in which HP conducted its investigation that has created controversy.

Among the several techniques used by internal and external investigators to identify the source of the leak was the illegal accessing of telephone records of board members and journalists using a method called pretexting. Here the investigator phones the telephone company pretending to be the person in question to get the required information. Dunn`s resolute answer to the accusations has been that she checked with her legal team several times along the way and was assured that the techniques being used were within legislative guidelines. -

Nevertheless, Smith points out that the ignorance argument may no longer be adequate in a court of law.

"In the Enron and WorldCom cases the ignorance argument was rejected. There has been a significant change to corporate culture, and fiduciary duty requires that senior management take responsibility for activities within the company," he explains.

Status:
HP`s chief ethics officer Kevin Hunsaker has been found to be at the centre of the scandal. Hunsaker, as well as Dunn and Keyworth, have so far left the company or been fired, while general counsel Ann Baskins and investigation head Anthony Gentilucci, along with "several others", according to an HP press statement, are "no longer with the company".

Meanwhile, the California AG has indicted Dunn, Hunsaker, Ronald DeLia - MD of Security Outsourcing Solutions, Matthew Depante - an Action Research Group (ARG) manager, and Bryan Wagner, an ARG employee, on charges of fraudulent wire communications, wrongful use of computer data, identity theft, and conspiracy to commit these crimes.

THE BAD APPLE

Apple has also been involved in internal investigations, this time around stock options. The JSE`s director of surveillance, Bill Urmson, explains how stock options are manipulated and this practice`s ramifications.

"Irregularities in stock options usually refer to the backdating of executive share options to more beneficial times. Here the option is dated back to a period where the share price was lower than what it currently is, so the difference plays out in the net asset value that the company receives. For example, if two years ago a company`s share was trading at 20 cents and today it is trading at 50 cents, any options that are backdated to the 20 cents price would see the company lose out on 30 cents per share, while the director gains that amount immediately," he explains.

Such has been the case at Apple. A statement from the company has revealed that a special committee has discovered that stock option grants made on 15 dates between 1997 and 2002 appeared to have grant dates that preceded the approval of those grants. Although the investigation found no misconduct by any member of Apple`s current management team, it did note that in a few instances, its CEO, Steve Jobs, was aware that favourable grant dates had been selected, but that Jobs did not receive or otherwise benefit from these grants and was unaware of the accounting implications.

Status:
Apple`s former CFO, Fred Anderson, has resigned from its board of directors and the company has said that it will provide all the details regarding the actions of two former officers in connection with the stock option grant irregularities to the US Securities and Exchange Commission (SEC).

MCAFEE`S GUILLOTINE

Another company investigating stock option deception is McAfee. The New York Stock Exchange-listed company warned shareholders earlier this year that it was undergoing a review of stock option grant practices and related accounting.

The review in question was conducted by a special committee made up of independent directors, independent counsel and forensic accountants. In its presentation to the company`s board mid-October it said that the security software company would be required to restate historical financial statements to record additional "non-cash charges for stock-based compensation expense over a ten-year period". The restatement, McAfee goes on to estimate, is likely to be in the range of $100 million to $150 million.

Nevertheless, the JSE`s director of surveillance, Bill Urmson, notes that the reputational damage in scenarios such as these is equally as damaging as the actual financial implications.

"These types of practices are indicative of a greater interest in personal gain than shareholder gain at a senior management and board level. Of course, shareholders are the parties who suffer the most and are least able to equip themselves to fight unethical practices as they are not actually involved in the business itself," he explains. "Accordingly, reputation means a lot to shareholders, both at a company and individual level. Shareholders look at the ethical standards of the people directly responsible for the company - the CEO, CFO and COO and get a feeling for whether they are the type of people that would look for a way around regulations. If there is any hint of scandal or lack of ethics and governance at these levels, shareholders are going to be suspicious and hesitant to invest."

Status:
While McAfee has yet to release the findings of its investigation and the relative restatements of its previous financial periods, it has terminated the services of president Kevin Weiss. Additionally, George Samunek, McAfee chairman of the board and CEO, has retired with immediate effect, apologising for the stock option problems occurring on his watch.

CUSTOMER BATTLEGROUND

Locally, one of the biggest stories to hit online IT news site ITWeb was that of a lockdown at Verizon Business`s Gallo Manor offices on 31 August, according to news editor Martin Czernowalow. The lockdown came as Dimension Data subsidiary Internet Solutions (IS) obtained an Anton Pillar order which allowed for a search of the premises and seizure of evidence without prior warning.

"The original story came by way of tip-offs from the marketplace and received in excess of 9 500 hits within 36 hours. The follow-up story a few weeks later showed that the buzz had yet to die down, receiving a further 5 400 hits. Of course, for the local industry, Verizon and IS represent some of the largest and most influential corporates in IT and action such as the Anton Pillar order was highly irregular," says Czernowalow.

The basis of the Anton Pillar order - which is notoriously difficult to obtain - has yet to be confirmed. However, speculation is rife in the marketplace that it involved IS customer information.

KPMG`s director of information risk management Sipho Ndaba explains the value of company information and why it must be protected at all costs: "The value is two-fold: firstly, companies will often hold and process private information about their clients that needs to be kept secure; secondly, companies hold information which is their own intellectual property and provides for their ongoing competitiveness and sustainability in the marketplace. Leaks of either type of information results in loss of competitive advantage and if revealed in the market, reputational damage, too," he says.

But what if the information involved is inside a person`s or outgoing employee`s head?

Ndaba says that this is why employee contracts must be drawn up in a manner that protects both parties during and after the employment period.

"Broadly speaking, information security must be considered and agreed to before an employee joins the company. Broad restraints may not hold up [in the labour courts] but specified restraint of employment by named competitors with due reasoning included should hold you in good stead. Additionally, companies need to have a non-disclosure contract drawn up with each member of staff, explaining the outcome if broken and the reasons behind such contracts. By taking pre-emptive action through employee contracts, you can avoid lengthy legal action down the line," explains Ndaba.

Status:
Although a finding was expected to be released mid to end of September this year, all parties involved have remained quiet on the matter. Czernowalow says that attorneys acting for the parties have said they have pushed their expectations out to the end of November before any substantial conclusions can be drawn.

IN THE SHADOWS

Local financial newspaper Business Report alleged that Cisco South Africa`s US parent was conducting an investigation into two senior managers at the local office.

According to the article, Cliffe Dekker had been appointed to investigate several allegations of mismanagement and questionable dealings within the company."The Silicon Valley technology firm appointed Cliffe Dekker after receiving a tip-off from a South African employee detailing allegations of victimisation of another employee, who was suspended after he had written a report questioning the awarding of a $3.5 million (R25 million) contract to Imvula Consulting. Imvula, which was appointed last year as a reseller of Cisco`s information technology solutions, has so far been paid $400 000 for its services," said Business Report journalist Thabiso Mochiko.

The article also points to a lack of corporate governance within the local subsidiary. The investigation is said to have been instigated by an e-mail tip-off to the US parent after Cisco SA GM Clive Fynn and the company`s London office failed to take any action on the Imvula report.

Mochiko explains: "Sources said that Cisco`s local management did investigate the allegation but later said that they had found no substantive evidence to back it up. The author of the report was subsequently offered "a golden handshake" to leave Cisco. When he refused, he was suspended for insubordination. His suspension then prompted the anonymous tip-off to Cisco`s California head office."

Status:
Officials from the US and South African offices have refused to be drawn on the matter, stating that the company does not comment on internal investigations.

CAPITALISING ON CONNECTIONS

Of course no story on South African scandals would be complete without the requisite `under the table` tender value inflation deal brought about by connections.

In this case, the company in question was Enterprise Connection, which is understood to have been the beneficiary of a R75 million tender, far exceeding the approved amount of R44 million.

According to a report in local newspaper The Star, the company - which has recently been acquired by JSE-listed Faritec - was implicated alongside Eugene Perumel, former chief director of the Gauteng housing department, and Sibusiso Buthelezi, the then housing head of department.

Based on a report compiled following an investigation by the Gauteng Shared Services Centres, the article highlighted tender irregularities "worth over R100 million in the Gauteng Department of Housing" to Enterprise Connection in the period July 2004 to May 2005.

While Perumel and Buthelezi receive harsh criticism in the article, The Star goes on to name Enterprise Connection directors Paul Moses, John de Villiers, Mncedisi Mayekiso and Litha Nkombisa and says "the report states that EC `fraudulently inflated prices and charged extra items`. Prices were allegedly inflated by including finance charges and insurance costs". Furthermore, the article also quotes housing department spokesperson Mongezi Mnyani as saying that the contract with Enterprise Connection had been terminated and that the department had found that the work done for it had been equivalent to the moneys paid.

So what does Faritec have to say to the allegations? Earlier this year, Faritec noted that its planned acquisition of Enterprise Connection had been held up by a court order against the company.

Speaking to ITWeb in April, Faritec CEO Simon Tomlinson said the transaction under dispute had taken place in the previous financial year and as the company was aware of the dispute, it had excluded the transaction from its acquisition of Enterprise Connection.

Status:
Although the court order, which held up Faritec`s acquisition of Enterprise Connection, was said to be settled, the party that took the action was never named. If this party was not the government, then Enterprise Connection directors Moses, de Villiers, Mayekiso and Nkombisa could still face action.