Blog : BOARD TALK
|Posted on February 29, 2016 at 9:45 AM|
Paula Loop, Leader of PwC's Center for Board Governance (based in the US)
WHAT DIRECTORS NEED TO DO TO DETER FRAUD
"In 2014, 45% of organizations in the US said they experienced some type of fraud. It’s no surprise, then, that companies, boards, and audit committees are concerned.
Economic fraud can come in many forms, from bribery, corruption, and money laundering to insider trading and financial reporting fraud. Technology has contributed to the increase in opportunity to commit fraud, as well as created innovative new ways to perpetrate and hide it.
CEOs play the key role in setting ethical expectations of a company’s employees, and that has a domino effect on management and employees. But it’s not always easy for directors to truly understand what the tone at the top and overall culture is at the company.
So what role do directors play to deter fraud? Directors can have more impact on deterring fraud than many would believe, and this responsibility typically falls to audit committees, given their financial reporting and regulatory compliance oversight responsibilities.
Here’s what they should be doing:
Audit committees need to understand that the level of interest they exhibit in a particular area will drive behaviors. By simply asking questions and requesting information about tone and fraud deterrence, management will generally respond with more emphasis on and consideration to the topic.
If management believes the audit committee is concerned, it will pay attention. And the information directors request when evaluating and influencing tone can be a strong reminder to management. We suggest they consider a variety of possible metrics, observations, and information, including:
• Employee satisfaction surveys
• Exit interview comments / data
• Peer feedback through annual assessments Candor vs. overly scripted meetings CEO communications about the importance of ethics and compliance and proper behavior
• Lack of rotation of international finance heads in certain locations
• Internal and external auditor input
• Board-level discussions about tone
• Board discussions about insider trading controls
Many directors are now taking steps to mitigate fraud. In fact, 68% of directors said they had board discussions about tone at the top in 2015, up from 46% in 2012. And 39% said they had specific board discussions about bribery and corruption.
The Dodd-Frank whistleblower rules have also added a new set of dynamics to deterring fraud, causing many companies to rethink their approach to handling internal allegations of wrongdoing. An effective compliance program monitored by the board may be a mitigating factor in a prosecutor’s decision to charge a company with wrongdoing. It may also reduce the amount of fines the company may face due to criminal action on the part of employees or third-party providers.
Audit committees should consider the following:
• Requesting periodic updates on the external enforcement environment and the company’s fraud training and prevention programs
• Being familiar with the US Federal Sentencing Guidelines requirements for effective compliance programs
• Understanding the nature and volume of allegations reported to the whistleblower hotline, noting that no complaints could be a sign that employees are not encouraged to report
• Appreciating that most employees do not report misconduct to the hotline but instead to the immediate supervisor; consequently, the company needs to educate a broad group of supervisors and managers on the importance of elevating complaints
• Focusing specifically on bribery and corruption controls; sanctions in this area have never been higher."
More information available at PwC's Center For Board Governance