Fantasy Sports Scandal Shows Importance of E&C Programs for Growing Companies

A recent scandal rocking the daily sports fantasy industry is another example that shows why companies—particularly young, growing companies—need ethics and compliance programs. Without them, it’s a good bet problems will follow.

Anyone who’s watched a major sporting event in the past few years, especially in  the past 12 months, knows about DraftKings and FanDuel. They’re daily fantasy competitions that have surged in popularity, and they offer big monetary payoffs.

A Lack of Specifics on Auditing, Internal Controls

News broke recently that a DraftKings employee made $350,000 on FanDuel. The media reported he had access to information that would have allowed for a bigger payoff if used on the other site. After an internal investigation, DraftKings said the employee couldn’t have used the information because he received it too late. Regardless, the reputational damage the company has experienced is significant.

In a statement, DraftKings said both companies “have strong policies in place to ensure that employees do not misuse any information at their disposal.” But neither company has provided many details on its internal controls, leading one expert to tell The New York Times that the industry has failed “to produce a clear and compelling answer to these questions to anyone’s satisfaction.” FanDuel also brought in former U.S. Attorney General Michael Mukasey to review its internal practices, showing how serious the company is—or, at least, how serious it wants to appear to be—about addressing its internal practices.

New Calls for Regulations

Based on my more than 20 years working with all sizes of organizations, it’s common that fast-growing companies, regardless of industry, often don’t pay enough attention to risk assessment and risk controls. Then, something seemingly obvious pops up unexpectedly—like, for these fantasy sports companies—lacking a policy that addresses the ability of employees with insider knowledge to compete in other, similar leagues. Each of the two companies has since banned employees from competing in the other service’s contests.

The scandal also has prompted new calls for regulations covering the daily sports industry. Of course, most companies would prefer to police themselves and address problems internally. But failing to do so can lead to nastier consequences, including government bans on participation, as Nevada did for its residents last week.

Maybe the DraftKings/FanDuel story—and the big headlines it continues to generate—will provide a lesson to other companies that start small and grow fast. Young companies must ensure that they have a process in place to identify their risks and to implement control mechanisms such as policies, education and monitoring. If not, they are gambling with their future success.

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