April 21, 2017

How to Help Prevent and Deter Fraud – A Board Member’s Perspective

By Gary Smith, Director, Assurance Services

How to Help Prevent and Deter Fraud – A Board Member’s Perspective

It seems like every day we sit down to read the news and we see another case of fraud being reported, be it accounting fraud, misappropriation of assets, or cybercrime. I’ve read that as much as 35% of organizations are affected by some type of economic crime. Among an organization’s employees, much of the burden to prevent and detect fraud rests with the chief financial officer, controller and the chief information officer. But it is especially important for those charged with company governance, as independent business experts who may sit on various boards and committees, to take a critical role in the prevention of fraud within their organizations.

In recent years, there have been increasing regulations that have raised the stakes for board and audit committee members. These individuals are required to become more engaged with independent auditors to ensure that the organization’s financial statements are fairly stated. They make sure the companies they lead have sound internal controls to help prevent, detect, and deter fraudulent activities.

Board and audit committee members must work diligently to influence a company’s culture by setting a tone at the top of the organization. To embrace such responsibility, they should ensure that the following are in place:

  • An appropriate internal control environment designed to prevent, detect and deter fraud.
  • An appropriate whistleblower plan, covering a broad range of possible events and procedures for determining the measures to be taken.
  • Policies that adhere to and promote ethical conduct programs to comply with laws and regulations imposed on the company.
  • Communication to employees regarding the consequences of failing to adhere to company policies.

Whether you govern an organization as a board member or committee member or owner, the following checklist can be useful to help get your organization on the right track.

Commitment to Integrity

  1. Develop a process to ensure those charged with governance are made aware of developments that affect financial reporting.
  2. Develop and distribute a code of conduct or ethics policies to all employees and governing committees and boards.
  3. Identify and remove any incentives or temptations that might prompt employees to engage in dishonest or unethical acts.
  4. Ensure there is a proper conflict of interest policy in place.
  5. Establish formal policies for employee evaluations and compensation.

Independence from Management in Exercising Oversight

  1. Set realistic financial targets and expectations.
  2. Be sufficiently involved with the entity to address important oversight responsibilities.

Structure, Reporting Lines, and Appropriate Authorities to Execute Financial Reporting

  1. Periodically evaluate the organization’s structure and make necessary changes based on changes in the business.
  2. Define areas of authority and responsibilities of management.
  3. Define a structure for assigning ownership of data, including who is authorized to make and/or modify transactions.

Individual Accountability for Their Internal Control Responsibilities

  1. Ensure management, employees and others are made familiar with policies and procedures set by the company.
  2. Empower employees to correct problems and implement improvements in their assigned areas.
  3. Rewards, such as merit pay and other incentives, can foster an appropriate ethical tone.

Related Industry