By Tara Hoke
Situation
Newspapers from a populous Mid-Atlantic state report that the president and owner of a small engineering firm has pleaded guilty to charges of income tax and wire fraud. The reports allege that the president, a civil engineer and ASCE member, defrauded the federal government of several hundred thousand dollars by underreporting his company's tax liabilities and overbilling a government client.
As depicted by the news coverage, the engineer's story reads like a classic fall from grace. A self-made success story, the engineer is known for his expensive tastes in food and wine and for his contributions to noteworthy projects throughout the region. He also has a reputation for making generous gifts to others; he contributes often to charity and is a prolific donor to political candidates from both major parties.
The engineer's firm receives regular consulting work on state and local public works projects. Because of the size and nature of the work, these consulting projects are typically not put out for bid but rather are awarded by an agency based on recommendations from the city engineer or a similarly placed official. As such, it is notable that the engineer enjoys a close relationship with several employees at the public works departments with which his firm does business.
One highly placed public employee first met the engineer through an alumni group and owes his current position at least to some degree to the engineer's connections; the pair routinely interact socially, and one of the employee's children worked for several summers as a paid intern at the engineer's firm. Another public employee takes on private work, performing quality-control services, and counts the engineer's firm as a regular client. Still others have received small loans or similar "favors" from the engineer, including one public employee who borrowed a vehicle owned by the engineer's firm and drove it for nearly a year.
Though the engineer's firm receives steady work over its two decades of operation, its financial success is ultimately hindered by a combination of economic downturns and increased financial demands from the engineer's family. When the stream of no-bid public contracts is no longer able to support his comfortable style of living, the engineer embarks on a scheme to supplement his income by fraudulently reporting his corporate expenditures.
Federal prosecutors allege that, over a three-year period, the engineer reports nearly $250,000 in fraudulent business expenses on his company's federal tax returns. These false expenses include thousands of dollars in "business entertainment expenses" for which the engineer is unable to provide substantiation, leases of so-called company vehicles that were in fact reserved for his family's personal use, and a variety of computer and electronic equipment purchases for which no business purpose can be articulated. In one year's tax filings, the engineer reports paying salaries to his two children as full-time employees, though one child is attending college in another state while the other is employed full time at another job.
Moreover, the engineer's fraudulent reporting is not confined solely to his corporate tax returns.
According to the federal indictment, the engineer overbills a public client by more than $60,000 for his work on a small roads project funded by the Federal Highway Administration. The overbilled amounts include payments described as "subcontractor payments" but purportedly made to his housekeeper and tailor, as well as a handful of fraudulent invoices in the names of friends and relatives, who purportedly cash the checks and then deliver the funds back to the engineer.
Under scrutiny related to the engineer's indictment, the public employees who funneled work to him are quick to disclaim any impropriety in their connection with the engineer. They all flatly deny any implication that they awarded contracts in exchange for favors or other benefits from the engineer. However, one acknowledges that he recommended the engineer for certain contracts because he thought he "was a good guy and needed the work," while another concedes that he may have been "naive" in accepting help from an engineer who did business with the agency.
The federal court accepts the engineer's guilty plea and sentences him to five years of probation plus repayment in full of the fraudulently obtained funds. Copies of the news coverage are forwarded to ASCE's Committee on Professional Conduct (CPC).
Question
In what ways did the member's conduct violate the ASCE Code of Ethics?
Discussion
At the time this case was considered, ASCE's Fundamental Canon 6 read, "Engineers shall act in such a manner as to uphold and enhance the honor, integrity, and dignity of the engineering profession," and guideline a added that engineers "shall not knowingly engage in business or professional practices of a fraudulent, dishonest, or unethical nature." The CPC felt that the facts of this case clearly indicated the member's knowledge and intent to defraud and that the public attention drawn to his actions was clearly harmful to the reputation of the engineering profession.
Moreover, as the member's fraudulent billing under a public contract served to defraud an engineering client, the CPC also felt that his actions were inconsistent with his obligation under Fundamental Canon 4 to "act in professional matters for each employer or client as faithful agents or trustees." They believed that the member's practice of extending favors and other benefits to public employees from whom he was soliciting work raised questions about his compliance with Canon 5's mandate on fair competition.
Accordingly, the CPC felt that the member's actions warranted investigation, and they contacted the member to request his side of the case. But the member proved unresponsive to the CPC's inquiries, and shortly thereafter his membership lapsed for nonpayment of dues. In accordance with ASCE's rules, the Board of Direction accepted this termination of the engineer's membership and directed the publication of notice in the Society's magazine that the member had forfeited his membership following notice of a pending ethics investigation.
While none of the public employees connected to this case were ASCE members, it is worth noting that their actions would also have raised questions under ASCE's Code of Ethics. Guideline a under Canon 4 notes that "Engineers shall avoid all known or potential conflicts of interest with their employers or clients and shall promptly inform their employers or clients of any business association, interests, or circumstances which could influence their judgment or the quality of their services." Even in the absence of an express exchange of public work for private gain, the employees in question had clear financial and nonfinancial connections to the member's firm. Under the dictates of Canon 4, these members had an ethical obligation to disclose this connection to the appropriate parties in the decision making chain, so that their recommendations could be examined in light of this potential outside influence. Or perhaps better yet, the employees should have removed themselves entirely from decisions involving the member so that even the appearance of impropriety could be avoided.
In 2006, ASCE adopted amendments to the Code of Ethics to further elaborate on an engineer's ethical obligation to avoid fraudulent or dishonest acts. These amendments added language in Canon 6 to mandate "zero tolerance for bribery, fraud, and corruption," and it included guidance that engineers should be "scrupulously honest in their control and spending of monies … with fidelity to the public, employers, associates, and clients." While a case such as this represents an extreme instance of financial impropriety, its example and the language of Canon 6 should serve as a reminder to all engineers of the ethical obligation to be wise stewards of the money-and the trust-extended to them by employers, clients, and funders.
Tara Hoke is ASCE’s general counsel and a contributing editor to Civil Engineering.
© ASCE, ASCE News, October, 2019
