Fraud deterrence in the role of leadership.

• Author: Bryan, Christopher S.
• Position: Fraud

The financial reporting scandals of the beginning of the fast decade led to enactment of the Sarbanes-Oxley Act of 2002, fueling efforts to strengthen internal controls to prevent reporting fraud. Those efforts have shown early signs of progress in reducing financial reporting fraud. However, ethics breaches and other types of fraud continue to plague many organizations.

And, despite the increasing focus on preventing organizational wrongdoing over the past 10 or so years, recent professional and academic research indicates that ethics and compliance breaches and cases of financial statement fraud and other forms of occupational misbehavior remain prevalent in organizations.

The importance of organizational culture and, more specifically, the role of executives in developing a strong ethical tone at the top leading to a fraud-resistant culture is growing.

Impacts of Wrongdoing

Opportunities for organizational wrongdoing are plentiful, and the financial impacts of wrongdoing are staggering. The Association of Certified Fraud Examiners' 2070 Report to the Nations on Occupational Fraud and Abuse estimates annual global losses due to fraud at $2.9 billion.

While fraud cases, ethics breaches and compliance issues at large U. S. public companies grab headlines, small organizations are not immune. In fact, ACFE research indicates that small organizations are often more susceptible to fraud schemes than large organizations. Unfortunately, the direct losses from an incident may be only a fraction of indirect losses from drops in market capitalization and damage to customer goodwill.

The magnitude of potential losses places the management of ethics, compliance and fraud near the top of risk management priorities. Corporate governance, legal compliance, accounting, auditing, fraud prevention and business ethics are areas of greatest concern.

For example, in the Center for Audit Quality's Deterring and Detecting Financial Reporting Fraud, A Platform for Action report, participants consistently identified three cultural themes to mitigate the risk of financial statement fraud: 1) a strong ethical tone at the top; 2) a skeptical and questioning mindset to increase objectivity; and 3) strong communication along the financial reporting supply chain.

Additionally, the ACFE report otters a fraud prevention checklist in which 75 percent of the items relate to cultural issues such as anti-fraud training, fraud reporting and the climate of honesty and integrity set by management.

In one notable recent case, Lynn Turner, former chief accountant of the U.S. Securities and Exchange Commission, blamed senior executives at American International Group Inc. for poor management and governance that led to poor tone at the top.

Tone at the top emerged as an important concept after it appeared in the 1987 Treadway...