What FEI members say about deterring financial reporting fraud.

• Author: Fornelli, Cindy
• Position: FEI NEWS - Financial Executives International

Last spring, Marie Hollein, CEO and president of Financial Executives International, and Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), led a series of discussions titled Deterring and Detecting Financial Reporting Fraud at FEI chapters across the country. Speakers included FEI chapter members, auditors and forensic specialists.

There was consensus among participants that financial reporting fraud is an ongoing concern for financial executives. The discussions centered around three conditions that typically are connected to financial reporting fraud: pressure or incentive, opportunity and rationalization.

Last October, CAQ issued a report on Deterring and Detecting Financial Reporting Fraud: A Platform for Action that discusses three themes for mitigating this "fraud triangle:"

* a strong, highly ethical tone at the top that permeates the corporate culture

* strong communication among participants in the financial reporting "supply chain" and;

* skepticism--a questioning mindset that strengthens professional objectivity.

The following summarizes some insights, concerns and practical suggestions related to the three areas that were discussed during the CAQ-FEI events.

Tone at the Top. Importantly, the need for a strong ethical tone at the top was the dominant point made at all of the meetings, closely followed by the role of communication in disseminating and reinforcing management's tone throughout the company.

Participants identified the most difficult environment for employees as one where management sends a mixed message ("we do the right thing, now meet the goals we've set for the quarter"), and emphasized the importance of realistic goals in establishing the right tone.

All acknowledged the power of the CEO to influence behavior explicitly and implicitly. They noted that there can be a fine line between a robust and proactive CEO and a dominating or bullying chief.

If a CEO crosses that line and the board is not strong enough to intercede, participants believed that the chief financial officer or others under pressure may have to resign in order to avoid becoming involved in a fraud or other impermissible activity. This can be particularly difficult in cities where the company is a dominant employer.

Tone at the top drives corporate culture. Participants described a positive culture as one that encourages sharing of views and discussion of tough questions (an "adult-adult" relationship between management and...