The Ethics of Darleen Druyun

What kind of system is it that one individual has the ability to determine multi-billion contracts without anyone checking up on it?

***
Chances are that you have never heard of Darleen Druyun.

Druyun began her career as a contracting intern in 1970. Thirty two years later, she retired as the most senior civilian woman in the United States Air Force.

She was at the time of her retirement responsible for a procurement budget of more than $US30 billion a year.

Court records show that she acquired power beyond her status and then used that power to walk over subordinates, humble industry executives and seek personal advantage at the Government’s expense.

Today she is in prison for misuse of position and her behaviour resulted in the untimely resignations of the Chief Executive Officer and Chief Financial Officer of aircraft manufacturer, Boeing.

***

Druyun’s self publicised reputation as a tough government negotiator and stickler for the rules encouraged her superiors to rely on her judgement.

For nearly 40% of the time at the Pentagon she had no supervisor at all.

The fortunes of defence contractors rested on Druyun’s decisions on competitions, her policy decrees and her awards of bonuses.

This was unusual – for an official at Druyun’s senior level would not normally decide the outcome of as many competitive tenders as she did nor get involved in the nitty gritty of contract negotiations. Those tasks were left to underlings who made the decisions themselves or offered their recommendations.

Druyun, however, actively discouraged her staff from making recommendations.

Druyun rarely took vacations and was known to cut short holidays to finalise negotiations.

In 2000, Druyun was considering whether to pay Boeing $US4 billion to update the C-130 planes. She had Boeing’s immediate future in her hands and she used some of the power to get something for herself.

Druyun called Michael Sears, the chief financial officer at Boeing, and asked him to arrange a job for her daughter’s fiancé, Michael McKee. Boeing set up the job right away.

And then, three months later, with the contract still on the table. Druyun asked for a job for her daughter, Heather. Boeing again complied.

Months after her daughter and now son-in-law went to work at Boeing; Druyun awarded Boeing the $4 billion contract.

But that was just the beginning.

Next Boeing presented an idea that was enormous – even by Pentagon standards.

It wanted to lease to the Air Force 100 767s as refuelling tankers. The cost - $US23.5 billion.

Critics thought he idea was much too expensive. But during the price negotiations, Boeing internal emails show that Druyun was siding with Boeing, not the Air Force: “meeting today on price was very good. Darleen spent most of the time bringing the USAF price up to our number.”
In the midst of the tanker negotiations, Druyun’s daughter (now in a Human Resource role at Boeing) emailed the Boeing CFO and revealed that her mother was retiring from the Air Force.

In November 2002, Druyun accepted an offer to be deputy general manager of Boeing’s missile defence system – with a $US250,000 salary and a $US50,000 signing bonus.

Unfortunately for Druyun there was congressional oversight of the contract and the offending emails were discovered.

An audit by the Congressional Budget Office found Druyun’s tanker deal would have overcharged taxpayers by nearly $US6 billion.

But it turns out that the tanker deal wasn’t the only “gift”. At her sentencing, Druyun stunned the Pentagon when she admitted swinging two other contracts Boeing’s way, together worth another half billion dollars.

The Pentagon is now reviewing every contract that Druyun handled during her Air Force career.
The fall out is also likely to cost the US Government hundreds of millions of dollars as companies unfairly ruled out of contracts seek restitution for the costs they incurred during the bidding process.

The Pentagon should have seen it coming – for someone that held everyone else up to the highest ethical standards – Druyun already had a chequered past.

In the early 1990s, she was found to have allowed the backdating of records and the reclassification of costs to speed up payments to a then nearly bankrupt McDonnell Douglas.

The Hudson Bay Company and the Origins of Modern Internal Audit

Honestly lay bare to the proprietors the true condition of the undertaking

***

Generally Internal Audit is thought to have started with financial and compliance audits.

It was believed to have arisen as a discipline as the growth and increasing complexity of firms in the early 20th century stretched the capabilities of managers and thereby created efficiency and effectiveness problems.

By adding managerial activities to financial and compliance, internal audits were recognised as a means of assisting overburdened managers.

A recent examination of the archives of the Hudson’s Bay Company (“HBC”) has suggested that the two stage history of internal audit may not be correct.

Inspections very similar to managerial internal audits were conducted at the HBC in 1871 – about 50 years prior to the generally recognised commencement of managerial internal audits.

Moreover, these inspections were introduced by the HBC at a time when the complexity of the organisation was actually decreasing.

***

The HBC is the oldest commercial corporation in North America and is the oldest commercial organisation in the world that continues in its original line of business – having been established by King Charles II of England in 1670.

From its longtime headquarters at York Factory on Hudson Bay it controlled the fur trade throughout much of British controlled North America for several centuries, undertaking early exploration and functioning as the de facto government in many areas.

The HBC was successful in pursuing a strategy of waiting at bayside ports for the aborigines to come down the rivers that annually flowed into Hudson Bay to barter their furs for European goods.

Competition led to the HBC undertaking in-land travel. Inland travel activities were particularly complicated. Ships from London had to be unloaded and the trade goods and supplies stored in warehouses at the ports or directly loaded into canoes and boats for shipping to posts. The trips took weeks or months.

In land travel was problematic for three important reasons:

• all employee actions were unobservable – consequently effort and diligence was not always explicitly known.
  
• employees were subject to opportunistic behavior – they were not always willing to give priority to the HBC’s interests.
  
• there was environmental uncertainty from random events – the arrival times at various posts could not be predicted as weather and environmental factors interfered with schedules.

Moreover, the exact distances and best water routes between posts were uncertain.

To manage the North American fur trade operation in the face of this extreme uncertainty, the HBC implemented six monitoring mechanisms:

• inventory records – inventory records were required to be detailed and kept for all trade goods and supplies in monetary and physical terms with reference to the actual post or depot location.
  
• accounting records – accounting records were required to show the costs of furs from each district.
  
• journals – the journals recorded what work was done by employees each day, the names of aborigines coming to trade, the arrival of the outfit and shipments of the furs.
  
• operational data – distances and load weights were recorded with the intent of improving efficiencies.
  
• councils – at annual council meetings (equivalent to modern day Board meetings), the HBC governor reviewed the performance of posts and shared operational information.
  
• annual review of operations – a full tour of all HBC operations was undertaken annually by Senior Management.

Establishment of Inspection Regime

As a partial solution to the operational problems in the fur trade, inspections were formally established in 1871 with the creation of four “inspecting chief factor” positions. Their duties included visiting posts and districts, examining the books, reporting on the condition of the facilities, evaluating personnel and making recommendations for improvements.

To ensure knowledgeable appraisals, inspectors tended to be experienced post or district managers.

However, there was recognition that an inspector could not “independently” inspect posts under his own responsibility. Therefore, the inspectors tended to inspect posts for which they had no responsibility.

Inspection reports were shared with the person in charge of the post or saleshop, and then sent to the more senior managers.

For the fur posts, district managers made recommendations for remedying shortcomings, to which the most senior inspector added his own recommendations in a letter attached to a copy of the inspection report sent to the council.

Inspections of this kind were an integral part of the management of the HBC from 1871 until at least 1914.

They were managerial in orientation, and as such they were an extension of the commissioner (modern day equivalent – Board Member) who did not have the time to visit and inspect posts and saleshops.

Inspections were undertaken through the use of a checklist, specified by the commissioner. Financial inspection was included, but as a very secondary focus.

More importantly, inspections by examining operating matters provided an alternative assessment to the financial trading accounts on how well the posts and saleshops were actually performing.


“Internal Audit at the historical Hudson Bay Company” in the June 2001 Accounting Historians Journal was used as the substantial reference for this summary