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Create & Maintain an Appropriate Culture

Culture is important in any organization but to have the appropriate attitude of honesty and high ethical standards is important to prevent fraud.  Management must demonstrate this model by providing a tone at the top emphasis on this culture.  After setting the tone, management must follow up on this commitment by hiring the right people for the job and ensuring that their hiring policies are effective at eliminating those people that do not meet the standards set by the culture.  The hiring process should entail some form of background check in order to gather some information about their past ethical behavior.  After acceptance of new employees, management should clearly communicate their expectations and require written confirmation of a mutual understanding of these expectations.

Methods of Establishing Ethical Corporate Culture

1.  Code of Conduct - Should identify values and ethics expectations of the company.  They are most effective when supported by management and placed in sight of employees.

2.  Training - On going updates throughout a employees time helps reinforce managements demand for ethical behavior.

3.  Consistent Punishment - Violators of Code of Conduct must be handled per the expectations set and done so in a timely manner.  It is necessary to enforce the rules to ensure that other employees see management as taking it very seriously.

Assessing the Risk of Fraud

Organizations can proactively eliminate opportunities to commit fraud by frequently assessing the risks and developing mitigation plans.  In order to assess the risk of fraud a company must understand and identify the source of their risks.  By creating a process to identify the most important risks they are able to design effective controls to mitigate the risk.  Using internal controls will have a two fold effect of prevention and detection of fraud by having alert procedures in place.

One of the most effective internal controls can be your other employees.  By creating a system of monitoring others work and segregation of duties, management is able to provide a means of preventing fraud while establishing a communication channel to report suspicious activity.  Sarbanes Oxley (SOX) has made this a requirement for public companies in that management must create a system to provide whistle blower protection for those that communicate that fraud is going on.  SOX also prohibits retaliation against employees who use the system to report questionable behavior.  If the company violates these requirements it is subject to a lawsuit by the employee.

Lastly, the most important control that public companies must submit to is having an independent audit by an accounting firm.  Although these firms are unable to test all transactions made by the company, by using statistical sampling they are able to address which accounts have the most significant risks therefore they can require more testing of those accounts.  These firms also test their company’s’ controls for material weaknesses.  If a company is found to have a material weakness they must fix the controls or will be issued a qualified opinion of their financial position.

Executive Fraud

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