Scandal in fantasy sports underscores the importance of internal process and controls

Details of the scandal engulfing the online fantasy sports company DraftKings should be common knowledge by now – A DraftKings employee admitted to the early release of data not generally available to the public and won US$350,000 on a rival site, FanDuel.

The comparisons to insider trading quickly – and logically – followed.

Questions abound that why a major player in the largely unregulated, multibillion-dollar (US$3.7B annually) fantasy sports industry didn’t have stronger controls in place to restrict access to protected information or ban its employees from participating in fantasy games elsewhere.

Without the structure and processes, the mess was totally predictable and only a matter of time. While DraftKings and FanDuel announced permanent bans on employees participating in fantasy leagues within days of the scandal breaking, the damage had already been done to their brands and reputations:

  • ESPN initially announced it would end DraftKings’ sponsorship and later said it would stop its ads.
  • The New York attorney general’s office announced an investigation
  • A Kentucky man is seeking class-action status that accuses DraftKings and FanDuel of negligence, fraud, and false advertising.

The lesson from this latest corporate blunder should be crystal clear: A well-designed system of internal controls is fundamental to reducing business risks.

Should DraftKings executives be accountable for not anticipating such problems? Considering the industry is largely unregulated, has seen remarkably rapid growth, and handles huge sums of capital on a weekly basis, the answer is an unequivocal “yes.”

While DraftKings is not currently publicly traded, it is a textbook example of how limited or poorly designed internal controls can quickly be overwhelmed by the pressures of rapid business success. One of the criticisms of mandatory internal process and controls regime is that start-ups lack the resources to support them. But without such an investment, organizations are at greater risk of making much costlier mistakes in the future.

It’s all about the old expression, “Pay me now, or pay me later.”

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