Hi EA Community,

In light of the FTX case that rocked the community, I would like to know if how much will the EA community will be willing to invest in better systems of control testing and performance assessments. Periodically doing these methodologies in accordance to Internal Audit Standards will provide the best shielding to as far as major errors or large scale fraudulent activities are concerned.

If the community wants a lasting solution, this is probably the best that you can arrive with at avoiding the same scandal to occur again.

I have expected that what I'm recommending here are already installed in the first place as but apparently yeah, the expertise in error and fraud detection seems to be not in the community's skillset - yet.

This community is probably one of the best groups of people I've come across so far in the field of altruism.. I don't want these movement go down like Enron or Lehman.

Let me know your thoughts..

Miguel

New Comment
6 comments, sorted by Click to highlight new comments since: Today at 11:10 AM

I think the EA community should have an organization full of private investigators and forensic accountants tucked away somewhere, with a broad mandate to look for problems focused on EA-connected places.

But FTX is a for-profit corporation. The fact that they're making donations doesn't give anyone the power to impose accounting standards on them; that capability is only held by government institutions with power of subpoena.

My proposition is for prevention of future fraud. There are internal audit reviews on policies and procedures for acquisition of grants / donations that I believe now will become a good safeguard if any EA org is assessing where the money is coming from. Requiring regular Audited Financial Statements from donors and be assessed by management doesn't seem illegal or needing government approval.

Investigations after issues have taken place seems like too much of a late reaction in my opinion. Prevention through regular checks and balance is still the best approach in my opinion.

If a charity asks a donor for financial audits, the response is going to be: We don't do paperwork for you. You do paperwork for us. Followed by giving the donation to someone else.

No Jim, financial audits are done quarterly, semi-annual or annual. Non-profit orgs doesn't need to request financial audits for them - if the donor is complying with IFRS or American Standards, they just need to submit or share the most recent copy of the Audited Financial Statements. If they do not have it, that is a major red flag.

I love that you're bringing discussion of the specific proposals.

I don't know about the specific finances of FTX, but I do know about audits. Auditors work based on norms, and those norms get better at predicting new disasters by learning from previous disasters (such as Enron). The same is true of air travel, one of "the safest ways of travel".

My guess is that the only way in which alarms would've ringed for FTX investors was by realizing that there was a "back door" where somebody could just steal all the money. Would a financial auditor have looked into that, the programming aspect of the business? I doubt it, unless specific norms were in place to look for just that.

I think that there are two specific disasters here: 

  • SBF's fraud, and
  • SBF harming the EA "brand"?

If what we want is to avoid future fraud in the Crypto community, then the goal of the Crypto community should be to replicate the air travel model for air safety[1]:

  • Strong (and voluntary) inter-institutional cooperation, and
  • A post-mortem of every single disaster in order to incorporate not regulation but "best practices".

However, if the goal is to avoid harming the EA "brand", then there's a profession for that. It's called "Public Relations".

PR it's also the reason why big companies have rules that prevent them from (publicly) doing business with people suspected of doing illegal activities. ("The wife of the Caesar must not only be pure, but also be free of any suspicios of impurity") 

For example, EA institutions could from now on:

  • Copy GiveDirectly's approach and avoid any single donor from representing more than 50% of their income.
    • Perhaps increase or decrease that percentage, depending on the impact in SBF's supported charities. 
  • Reject money that comes from Tax Havens.
    • FTX was a business based mainly in The Bahamas.
    • I don't know what is the quality of the Bahamas standard for financial audits. In fact, I don't even know if they demand financial audits at all... but I know that The Bahamas is sometimes classed as a Tax Haven, and is more likely that we find criminals and frads with money in Tax Haven than outside of them.
  • Incentivize their own supported charities to reject dependence on a single donor, and to reject money that comes from Tax Havens.
  • Perhaps also...
    • ... Campaign against Tax Havens?
      • Tax Havens crowd out against money given to tax-deductible charities, and therefore for EA Charities.
      • There is an economic benefit to some of the citizens of the Tax Haven countries, but when weighted against the criminal conduct that they enable... are they truly more good than bad?
    • ... Create a certification for NGOs to be considered "EA"?
      • Most people know that some causes (Malaria treatments, Deworming...) are well-known EA causes.
        • They are causes that attract million of dollars in funding.
      • Since there is no certification for NGO0s to use the name "EA", a fraudster-in-waiting can just
        1. Start a new NGO tomorrow.
        2. "Brand" itself as an EA charity
        3. See the donations begin to pour-in, and
        4. Commit fraud in a new manner that avoids existing regulation
        5. Profit
        6. Give the news cycle an exciting new story, and the EA community another sleepless night.

In fact, fraud in NGO's happens all the time. One of the reasons why Against Malaria Foundation had trouble implementing their first Give Well charity is that they were too stringent on the anti corruption requirements for governments.

It's in the direct interest of the EA community to minimize the amount of fraudulent NGO's, and to minimize the amount of EA branded fraudulent NGO's.

  1. ^

    In fact, at the same time that we're discussing this, a tragic air travel accident happened on a Dallas Airshow. Our efforts might be more "effective" by not discussing SBF and instead discussing Airshow Security and their morality.

Great points here.

My problem with post mortem or investigations is that it is late of a reaction, EA image has been tarnished and the total cost of a scandal could not be computed. I still believe that installing a dedicated governance team reviewing all of the major risks where inflows and outflows of money is involved is still a better approach.

Requiring and reviewing financial statements audited by a big 4 firm is still the best approach if a certain charity/Non profit org is receiving a donation - assuring that the donor is doing its best to comply with international or American accounting standards. Audited FS submissions also solves the tax haven comment you shared though I believe legitimate companies still do have accounting standards and audit standards especially as they still need to engage in the business world. It was described that SBF has a backdoor mechanism in their books that evaded executives, accountants and auditors - if this is true, the tax haven issue is not the culprit. Btw, I live in the nearby Cayman Islands and we still do accounting here following International Accounting Standards.

 

I have no problems with strong inter institutional cooperation but it still needs some kind of system to work with like who plays the lead and the follower in certain scenarios