The detection of financial reporting fraud is a significant responsibility of financial executives and, although it has dropped from the headlines of late, the threat of fraud is always around the corner. The Anti-Fraud Collaboration (AFC) was formed in October 2010 by the Center for Audit Quality (CAQ), Financial Executives International (FEI), The Institute of Internal Auditors (The IIA) and the National Association of Corporate Directors (NACD) to promote the deterrence and detection of financial reporting fraud. Each member organization represents key participants in the financial reporting supply chain.
Financial Executive magazine sat down with the leaders of the collaboration including: Cindy Fornelli, executive director of the Center for Audit Quality; Ken Daly, president and CEO of the National Association of Corporate Directors; Marie Hollein, president and CEO of Financial Executives International; Richard Chambers, president and CEO of The Institute of Internal Auditors; and Hal Garyn, vice president of professional practices at the IIA, to discuss the current environment and plans for the future.
Financial Executive: How would you describe the current environment in fighting financial reporting fraud compared to five or 10 years ago?
* CINDY FORNELLI * 1 think the environment has changed significantly in the last five years. There is much more awareness, as evidenced by the Anti-Fraud Collaboration. We see people taking a holistic approach and appreciating that each key member of the financial reporting supply chain--management, internal audit, external audit, and the audit committee or the board of directors--has an important role to play
But each of constituents can't be looking at their roles in a silo. There has to be that integrated and holistic approach. Also, of course, we can never rest on our laurels. We have to be ever-diligent in our approach to trying to deter and detect financial reporting fraud.
* RICFIARD CHAMBERS * Ten years ago we were coming out of the round of infamous financial fraud that took down some iconic companies. I don't think that financial reporting fraud is nearly as prevalent and the risks aren't as great as they were 10 years ago. I think this is one of those areas and one of those risks that will be somewhat cyclical.
* HAL GARYN * I would say that certainly the Sarbanes-Oxley Act prompted organizations to pay close attention to the controls over financial reporting risk. The Center for Audit Quality (CAQ) formed in 2007 took the lead with a specific focus on deterrence and detection of fraud. At the same time we've seen a renewed focus in this area as well from the Public Company Accounting Oversight Board (PCAOB) and the U.S. Securities and Exchange Commission. All of those things are creating attention.
* KENNETH DALY * Fraud is a constant, but the harm it does has increased geometrically due to social media, which increased reputational and brand risk. Fortunately, directors recognize the reputational and brand risks now far better than they ever did before and I think the amount of time and energy the director community is willing to apply to that area has also gone up significantly.
* MARIE HOLLEIN * I agree with everyone that the awareness of financial fraud is much greater than it was several years ago. There is also--I think--a greater sense of duty throughout organizations and the industries to sound the fraud alarm when needed. While it is primarily the financial executives' responsibility to both deter and detect financial reporting fraud, it is everyone's responsibility, collectively, to improve our abilities in this area.
FE: What are your organization's key priorities in its focus on financial reporting fraud education going forward?
* CHAMBERS * One of our key priorities is to be part of the community that addresses the risks around financial reporting fraud. We are very gratified by the opportunity to work with other partners from the CAQ. So certainly our priorities are to continue to help position internal auditors as a resource to help fight financial reporting fraud and to help be, in some respects, that last line of defense within a company. We subscribe to the three lines of defense model, and that third line of defense within an organization, within a company, is the internal audit function. And so we continually work to help to train and educate internal auditors and our members as to how they can play a key role in that.
* GARYN * There are two...