In the world of finance we are no strangers to fraud. The top five financial frauds that companies have historically engaged in have involved concealment of liabilities, fictitious revenues, overstated asset values, improper or no disclosure, for example of contingent liabilities or cross guarantees, and creating timing differences that broadly involve accelerating revenue and/or delaying expenditure.
Fraud is different to error. The critical issue is intent. Mistakes might best be characterised as unintentional errors, while fraud is the use of deception or deliberate misrepresentation to obtain an unjust or illegal advantage.
The environment in which fraud and scandal flourish has four characteristics: Incentive or pressure to meet short term goals, opportunity afforded by weak controls, a dominant individual or ineffective regulation and finally no expectation of being caught or censured.
Here's what you can do:
Conduct a risk assessment
The CFO should conduct a full organisational risk assessment that encompasses all aspects of business from customer profile -- what countries do you do business in? Do you work with any government agencies? -- to supplier and employee credentials and corporate culture.
Implement a zero tolerance policy
Make it clear that your organisation has a zero tolerance policy in respect of fraud and governance issues. Implementing a zero tolerance policy is a hearts-and-minds challenge that will form the bedrock of the culture that a company has in place. What are the company’s ethics and values and are these widely promoted in staff induction procedures, staff meetings and employee handbooks?
Lead by example
Remember that any corporate culture is permeated from the top. Management has to lead by example – the Murdoch enquiry has shown us that a failure by management to fully engage or claim ignorance of what is really going on is a poor defence.
Put in place a hotline
When it comes to discovery most fraud and governance issues come to light as a result of tip off or whistleblowing. It will come as no surprise that one of the most effective controls any company can have in place is a hotline for employees, customers and suppliers to report fraud or governance issues. The hotline number should be well advertised throughout the company.
Paul Smethurst is a forensic and corporate investigation specialist and partner at accountants Carter Backer Winter.