Fighting Financial Reporting Fraud: a team effort.

• Author: Hollein, Marie
• Position: President's page - National Association of Corporate Directors - Institute of Internal Auditors

The presence of fraudulent financial reporting is something we're always working to eliminate. It's certainly of deep concern to all of us in the profession. Hard to believe it's been more than eight years now since the passage of the Sarbanes-Oxley Act, legislation that continues to generate debate and discussion in the corridors of corporate America.

[ILLUSTRATION OMITTED]

We've learned a lot in the ensuing years. The Sarbanes-Oxley Act of 2002 did much to promote better financial performance by internal auditors and to improve the culture of the boardroom. Still, nearly a decade removed from the accounting scandals that tested us all, reporting fraud remains an abiding concern of the investing public.

For more than a year now, I've had the opportunity to take part in a number of roundtable discussions sponsored by the Center for Audit Quality. These events were designed to investigate fraud in our nation's reporting methods and to propose solutions that might put a dent in the problem. Our conferences brought us to several venues in the United States.

I was honored to participate not only with CAQ, but with our friends and colleagues from The Institute of Internal Auditors (IIA) and the National Association of Corporate Directors (NACD). I like to think of Financial Executives International and its fellow public policy and advocacy organizations as important links in the financial reporting "supply chain"--a chain that binds boards of directors, audit committees, internal and external auditors and the associations that represent them.

As part of our tour, we identified three conditions that make up what we call the "fraud triangle" of dishonest reporting. The first is pressure to meet short-term financial objectives, and then trying to conceal bad news that might follow until losses can be recouped. That's been an all-too-common method used to justify fraud.

Secondly, many who follow this path believe they can escape detection because of soft or weak internal controls. Unfortunately, in many instances, their assessment has turned out to be correct. And third, there's the timeless excuse of rationalization. There will always be someone who believes his or her behavior isn't really fraud, even in the face of clear evidence that proves otherwise.

The roundtables included investors, academics and regulators and generated lively discussion at each turn about the root problem and ways to overcome it. One product result from these...