Whistle-Blowing at Northrop Raises Questions on Auditor’s Role
Terry Shielke, a senior auditor at Northrop assigned to review the company’s troubled MX missile guidance program, blew the whistle on his employer this week when he handed over a stack of imputative internal audits to the Congress and to the Los Angeles Times.
In doing so, did Shielke fulfill his ethical responsibilities to the public or did he breach a trust with Northrop?
The audits Shielke leaked raise technical doubts about the reliability of the MX system and they suggest that Northrop has significant flaws in its manufacturing process. But the company disputes the audits, saying that they were unsigned, undated and incomplete. In one case, an audit fails to indicate that the Air Force condoned certain practices that might appear improper, Northrop said.
Nonetheless, Shielke’s act has galvanized internal auditors, who have been fiercely debating the moral issue of how auditors should respond to potential wrongdoing.
“There is a dilemma,” Peter Wilson, president of the Institute of Internal Auditors, a national professional organization, said in an interview Friday. “There are people who say in their own conscience that they could not work with a corporation (that) would hide fraudulent activity. They say they would go out and blow the whistle. But others say that is a lot to ask of somebody who has a mortgage and a family.”
Indeed, Shielke, 37, has already begun to experience the repercussions of his act. He has now apparently gone into hiding, claiming through his attorney, Robert Kilborne, that he is fearful about his personal safety.
“Thousands of other auditors in the industry will be watching me,” Shielke said in an earlier interview. “If I get shafted or railroaded, then other auditors are going to say, ‘I can’t afford that to happen to me.’ They’re going to sit back. They’re not going to report things. They’re not going to rock the boat.
“But if the public takes a strong stand, if they enact legislation or they write their congressman or if stockholders write the chairman of the board and say, ‘Damn it, listen to your auditor,’ then auditors will see that they have support, then they’ll bring out problems. They’ll make stands that the company has to do the right thing by the public, the customer, the stockholder, the employees.”
A Northrop spokesman said Shielke is still on the Northrop payroll. He said Shielke called in sick last Thursday, the day he apparently went into hiding.
But, Kilborne said, “you have a man out there who is confused about what his future holds. He was caught in a moral dilemma, where he saw the American public being cheated and a missile system being produced that was flawed.”
Some members of Congress are sympathetic to auditors like Shielke and believe that they should have some form of protection. Rep. Ron Wyden (D-Ore.) has introduced legislation that would provide new safeguards and impose new requirements on internal auditors.
“The internal auditor is in a financial no-mans land, because many of them want to make sure that financial wrongdoing is corrected, but they they are in a tenuous position,” Wyden said in an interview Friday. “If we are talking about major fraud, an internal auditor should be required to take that information to government regulators.”
Aerospace industry executives, however, have been arguing in the past year that they are capable of self-governance on these legal issues, if they are given the chance. Congressional critics, such as Wyden, scoff at that concept in the current legal framework.
“Without giving new status to the internal auditor, the whole idea of self-governance in the defense industry falls apart,” Wyden said. “What they need is some form of protection. Their status needs to be enhanced. At best right now, they are in an ill-defined position.”
Code Conflicts
Interviews with internal auditors in Southern California confirm that position. One auditor notes that even the code of ethics issued by the Institute of Internal Auditors is not without contradictions.
The code says, for example, that “Members, in holding the trust of their employers, shall exhibit loyalty in all matters pertaining to the affairs of the employer. . . .” But then it goes on to say, “However, members shall not knowingly be a part of any illegal or improper activity.”
Wilson, the president of the institute, agrees that auditors today face moral contradictions and adds, “We don’t have an instant answer for that.”
The institute is conducting a study, entitled “The auditors responsibility for reporting on sensitive issues,” a euphemism for the whistle-blower issue.
“There is no question about the responsibility of an auditor to report these things to senior management and to the audit committee of the board. Whether you go beyond that is a very difficult question,” Wilson said.
Responsibility to Public
Auditors have a far broader role in overseeing operations than in the past, when their primary job was to certify financial reporting. That has made the current Northrop case even more important.
“One of the most remarkable features of this case is that at Northrop there were internal audits floating around for years and years about some of these problems and they weren’t doing anything about it,” Wyden said.
Shielke says that is what finally drove him to go public.
“They have to realize their responsibility to the public,” he said. “They just haven’t made up their mind that they’re going to fix things right. They’ve been told over and over again by everybody and their brother, government auditors, their own internal auditors, special reviews where they paid consultants. Everybody has told them the same thing, and nothing has been changed. Everything is schedule driven. Right now, their whole thing is just to meet the schedule.”
Northrop has been as much as four months behind schedule in delivering guidance systems for the MX, leaving 10 of the 27 missiles now in silos without any guidance system. The Air Force is withholding $108.9 million in contract payments to Northrop because of the late deliveries.
