Oct 18, 2023

Do You Have A Diligence Problem? How To Tell

Tools

Do your organization, your team, your co-workers have a diligence problem? That is the subject of this post. Identifying red and orange flags that signal diligence issues.

Look For Signs

Diligence serves as the foundation for multiple functions within your organization, including mission, finance, business operations, legal and compliance work. So how would you you know if your diligence foundation has problems that need to be addressed?

The answer is that you need to be on the alert for outcomes, behaviors and attitudes that signal possible diligence problems.

This post is going to list twenty of these outcomes, behaviors and attitudes that may be signs of a diligence issue. Some of these are more indicative of diligence problems than others but you won’t know unless you take the time to do a review.

These lists are not exhaustive and are very general, it is not refined for your business. But it is a starting point and the expectation would be that you would take the list and refine it to fit your business adding your own ideas based on your experiences and observations.

Red Flags

Begin with the red flags. These are events that are pressing because the event may:

  • involve third parties including regulators, government officials, or parties to legal proceedings
  • have external consequences such as fines, losses, suspension or loss of a license
  • have “domino” effects within the organization and even outside of the organization, including triggering reporting requirements, loss of reputation and even leadership turnover.

The diligence review for these types of event needs consider that there may be two types of diligence issues present:

  • specific diligence lapse(s) that resulted in the event and
  • internal diligence lapses that allowed the event to go unrecognized, unchecked, unresolved, or unreported
  • Legal Proceedings – Legal proceedings are not unusual and may even be typical for your business environment. But have you performed a review to identify if there are diligence issues associated with actions that gave rise to the proceeding? Examples of legal proceedings that may have a diligence root cause include, product liability cases filed against you or cases you file to recover loans that perhaps should never have been made in the first place.
  • Compliance/Regulatory Actions – Does your organization have a history of compliance failures, lapses or criticisms from a regulatory authority? Are you collecting information about these actions and analyzing them to see if there were diligence lapses?
  • Criminal Activity – This applies to both internal criminal activity as well as external criminal activity directed at the organization. Can you identify diligence lapses that are causing the organization to be vulnerable to internal and external criminal activity?
  • Internal Investigations – Are you conducting internal investigations? If so, why? Are you looking to see if there are underlying diligence lapses that allowed the behavior that is the subject of the investigation?
  • Whistleblower Activity – If your organization is the subject of a whistleblower claim, you have a diligence problem. Why? Because if there is behavior that is even possibly unethical or illegal and the internal structure of the organization does not have a mechanism or the will to identify or address that behavior that is a major diligence lapse in and of itself.
  • Ombudsperson Complaints – Are there common themes to these complaints or issues and if so is there a diligence component underlying these complaint? the office of the ombudsperson is a useful and important tool for identifying internal issues including diligence issues.
  • Ethical Issues – Are you seeing behavior that indicates a lack of ethics? Why is this happening? Was there a diligence failure at the hiring level, training, monitoring? Ethical behavior should be the core of your organization’s principles, you can’t afford to ignore ethical issues.
  • Audit Results – This doesn’t just mean financial audits. It means all formal processes of internal and external review. Audits are designed to provide you with information. Use this information to identifying diligence lapses, if any.
  • Security Issues – Organizations are under attack from multiple sources. This is to be expected, being the target of an attack is not a diligence red flag. A successful attack is the indication of a diligence lapse.
  • Professional Diligence Staff Turnover – Large organizations have multiple departments or people that perform core diligence activities. This includes legal, compliance, audit, finance, quality, product safety, IT, and security departments. If there is frequent or large turnover among these staffs you have to ask why? If these roles are performed by non-employee professionals such as consultants, law firms, accounting firms and these firms have withdrawn their representation, you have to ask why? This type of turnover is a possible sign that something is happening that is unacceptable to a diligence professional and they have made the decision it is better to leave or withdraw than to continue to work with the organization.

Orange Flags

If red flags present at least the possibility of direct evidence of a diligence lapses, orange flags are either precursors to more serious issues or taken in the aggregate are hints that there may be serious underlying diligence lapses.

These orange flags do not appear as audit results, regulatory or legal actions or give rise to investigations or formal complaints. These are more subtle. So, how do you know if this is happening? The answer is – by paying attention. This isn’t about spying or micromanaging, just paying attention. Paying attention when you assign work, when you discuss work, when work product is submitted.

  • Errors – Are people making errors? Occasional errors are normal but if you see that individuals are making repeated errors. or that groups of people, such as a team are making errors of if you see the same error repeated multiple times by different people, there is an issue. Each of these circumstances needs attention. You need to find out why the errors are happening.
  • Judgement Lapses – This goes beyond an error. While the phrase is a “lapse in judgement” a lapse in judgement is really a failure of judgement. Failures in judgement require thorough review. Do you have a diligence lapse or something worse, such as willful blindness or deliberate unacceptable behavior.
  • Lack of Preparation – Diligent people prepare. An ongoing lack of preparation from an individual or set of people is a diligence problem that needs to be explored. Why are people unprepared. Do they lack instruction, training, resources or is something else happening?
  • Failure to Ask Questions – Diligence requires questions. Probing, critical questions are a tool for achieving clarity, a goal of diligence. If you have a workforce that is not asking questions you have to ask, how are they performing diligence?
  • Lack of Robust Dialogue – Similar to asking questions, robust dialogue is a foundation of good diligence. If people are not willing to participate or are not being allowed to participate, how are they performing effective diligence?
  • Apathy – Errors, lack of preparation, failure to ask questions or sustain robust dialogue are all indications of a lack of engagement or apathy. Apathetic behavior will not support diligence.
  • Confusion – If there is an ongoing sense of confusion in the organization or among groups of people, you need to understand the source of confusion. Confusion does not lead to diligence it leads to errors, judgement lapses/failures, and apathy.
  • Bad Communication – Are you seeing a lack of communication or bad communication. This may be from the top down or among team members, or even with third parties. Communication includes strategies, processes and procedures that govern diligence activity. If you don’t have these elements in place you will not have effective diligence.
  • Infrastructure Deficits – An organization may have the best intentions but if it can not supply the necessary infrastructure and resources to perform diligence, there will be diligence failures.
  • Bad Record-keeping – Finally, bad record keeping is a diligence issue in and of itself. If the organization cannot rely upon its records to accurately reflect its diligence work it will fail audits and regulatory reviews, have trouble in legal procedures, needlessly expend resources in “reinventing the wheel” and it will lose valuable diligence learning.

What Is Next?

These flags are a beginning. They are signs and like all signs they can be ignored or they can be followed. The way to go forward is to take these flags as the start of a process. A process in which the organization seeks to understand, repair, educate, support, reinforce and ultimately build diligence into its foundation. The result will then be not just more diligence but better business decisions, better ethics, integrity better mission adherence and better legal and regulatory compliance.