An Abundance of Resources to Fight Financial Reporting Fraud
Financial reporting fraud is relatively rare, but it remains a serious challenge. Research from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has indicated that the median cumulative monetary loss resulting from instances of this type of fraud is around $12 million.
The bad news: Financial reporting fraud, like most crimes, will always be a threat. The good news is that accountants and auditors, financial executives, boards of directors, and other key stakeholders across the financial reporting supply chain now have more resources and knowledge than ever to aid them in deterring and detecting fraud. What's more, we know that careful and comprehensive application of resources makes a huge difference to detecting fraud at companies of all sizes.
What Works in Fighting Fraud
Thanks to a wide array of research efforts in recent years, we have a very good grasp of both the factors that lead to financial reporting fraud and the steps necessary to address those factors. One of the most important of these steps is for business leaders to build corporate cultures that systematically value acting ethically and doing the right thing. Such strong, ethical corporate cultures begin with executives setting the right "tone at the top," which in turn filters down to create a strong "mood in the middle" and "buzz at the bottom."
These efforts aren't just desirable in principle, they get results. A new report from the Ethics Research Center (ERC), for example, finds that the "strength of a company's ethics culture and the effectiveness of its internal ethics and compliance (E&C) program are closely tied to workplace behavior." Indeed, according to ERC research, an alarming 62 percent of workers at large companies without effective E&C programs report observing misconduct. But at companies with effective E&C programs, that rate plunges to 33 percent. (Full disclosure: My organization, the Center for Audit Quality, sponsored the ERC report; ERC's research was independent.)
So what are the elements of a comprehensive E&C program? The ERC lists seven:
- Written standards of ethical workplace conduct
- Training on the standards
- Company resources that provide advice about ethics issues
- A means to report potential violations confidentially or anonymously
- Performance evaluations of ethical conduct
- Systems to discipline violators
- A stated set of guiding values or principles
"Well-implemented ethics and compliance programs make a difference, often a big difference," says the ERC report.
Practical Resources for Implementation
Of course, building out the elements cited above requires substantial commitment, effort, and know-how. Happily, there are an abundance of resources offering practical suggestions.
As the ERC report itself shows, resources can come in the form of reports and white papers. One organization producing such reports is the Anti-Fraud Collaboration, a group that unites the Center for Audit Quality, Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors.
In November 2014, the Anti-Fraud Collaboration released a publication—The Fraud-Resistant Organization: Tools, Traits, and Techniques to Detect and Deter Financial Reporting Fraud—offering a range of recommendations that are scalable to different stakeholders and organizations of different sizes. Drawing on a wide body of research and recent roundtable discussions, The Fraud Resistant Organization takes an action-oriented, global view.
Here are a few more noteworthy reports:
- ACFE's Report to the Nations On Occupational Fraud and Abuse
- EY's Global Fraud Survey
- Kroll's Fraud Report
- KPMG’s Who Is the Typical Fraudster?
Another effort from the Anti-Fraud Collaboration is its series of case studies. These are a set of hypothetical fraud scenarios, which are based on the Harvard Business School case method. Participants in case study teachings start with a set of facts about a fictional company dealing with a fraud. Guided by an instructor, they then discuss what could have been done to address the situation.
Last, but certainly not least, webcasts and other video material can be highly valuable resources. For its part, the Anti-Fraud Collaboration recently has produced a series of webcasts (all available for free on YouTube) in which experts from across financial reporting offer diverse perspectives and actionable tips.
- How Corporate Culture Can Breed Fraud (December 2013)
- Ethical Corporate Cultures (April 2014)
- Effective Whistleblower Programs (July 2014)
- Building a Fraud-Resistant Organization (January 2015)
Spread the Word
In the fight against financial fraud, an area in which financial regulators are reportedly increasing their focus, it is critical that all stakeholders gather and absorb insights from resources like these. Equally important is for all of us to convey that knowledge and perspective to others. So read a report, peruse a case study, or watch a video—then share that resource with colleagues or your connections on LinkedIn and other social networks. Let's spread the word far and wide: financial fraud is a tough challenge, but we have many resources to help us address it.
A former Deputy Director of Investment Management at the SEC and Senior Vice-President at Bank of America, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.