Can honesty be legislated?

• Author: Roy, P. Norman
• Position: From the President

In 1820, English clergyman and author C.C. Colton wrote, "There are some frauds so well conducted, that it would be stupidity not to be deceived by them." Nearly 175 years later, we are frequently surprised by revelations of frauds so well-conceived that they have gone undiscovered for lengthy periods. And, yet, a conviction that fraud can be prevented by legislation apparently continues to prevail in certain circles. But this conviction is as unfounded as the conviction held by perpetrators that they can "get away with" their fraud forever.

FEI has long believed that good ethics are good business and has demonstrated this belief through the adoption of a code of ethics for members, the recommendation that members include in their company's annual report a management report on internal controls, and our participation as a member of the Committee of Sponsoring Organizations (COSO) of the National Commission on Fraudulent Financial Reporting (the Treadway Commission). The Treadway Commission recognized that there were varying interpretations and philosophies regarding an entity's internal controls. It recommended that the sponsoring organizations "work together to integrate the various internal control concepts and definitions and to develop a common reference point." According to the commission, this would "help public companies judge the effectiveness of their internal controls, and thus help public companies improve their internal control systems"

This fall, after nearly three years of work that included two exposure drafts, many comment letters, and countless hours of discussion with corporate CEOs, CFOs, academics, accountants, auditors, legislators, and regulators, COSO published its report, "Internal Control--Integrated Framework." The report defines internal control, describes its components and provides criteria against which an internal control system can be assessed. It urges corporations to report on their internal controls and it provides evaluation tools and guidance for use in evaluating the company's internal control system.

The report has met with generally favorable reviews. The Federal Deposit Insurance...