Management Is Responsible, Too; Practical Advice to Help Corporations Prevent, Detect and Deter Fraud

The audit standard issued by the AICPA auditing standards board (ASB) in October 2002--SAS no. 99, Consideration of Fraud in a Financial Statement Audit--does something no audit standard has ever done. It contains a document titled Management Antifraud Programs and Controls: Guidance to Help Prevent, Deter, and Detect Fraud, which challenges corporate management to be equal partners with auditors in creating an environment that neither condones, nor is conducive to, the existence of illegal activities. "Both SAS no. 99 and the document are important first steps toward regaining public trust in the integrity of U.S. corporations," says Dennis Chookaszian, CPA, former chairman and CEO of CNA Insurance and a member of both the antifraud detection subgroup and the panel on audit effectiveness which provided the foundation for the SAS. "The standard, which is the cornerstone of the AICPA's new antifraud and corporate responsibility program, does a good job of telling CPAs what they should be doing during an audit. But what about management's role? Just as the auditor should be on heightened alert, so too should corporate executives." FRAUD COSTING U.S. COMPANIES BILLIONS The document, sponsored by seven professional associations including the AICPA, spells out specific recommendations to help boards of directors, audit committees, management and others prevent and root out fraud of all kinds--from unproductive behavior and employee theft to misappropriation of assets and fraudulent financial reporting. "Fraud is a significant problem for U.S. companies," says Joseph T. Wells, chairman of the Association of Certified Fraud Examiners (ACFE) and a member of the antifraud detection subgroup. Indeed, according to the ACFE's 2002 Report to the Nation: Occupational Fraud and Abuse, an estimated $600 billion, or about $4,500 per employee, was lost last year as a result of on-the-job fraud and abuse. Although financial statement fraud was the most costly, with a median loss of $4.25 million per occurrence, about 95% of all occupation al fraud incidents actually involved asset misappropriation and corruption. "The exhibit was designed to help create a corporate environment that will deter and detect both kinds of illegal activities--financial statement fraud and traditional employee embezzlement and theft," says Wells. "The same ethical corporate culture, processes and controls, and oversight that help corporations prevent financial statement fraud also protect against asset misappropriation and corruption." Wells points out that small businesses may find the exhibit especially useful since fraud is a particularly severe problem for them. "Surprisingly, a single instance of fraud is likely to be more costly to a small business than to a large one," he says. The average scheme in a small business, the ACFE report noted, caused $127,500 in losses, compared to $97,000 at the largest companies. CORE VALUES The document identifies the measures an organization should take to prevent, deter and detect fraud. It maintains companies should establish three fundamental practices: * A culture of honesty and high ethics.  Antifraud processes and controls.  An appropriate oversight process. Implementing all or even some of these measures not only helps companies protect themselves and their employees against fraudulent acts but also potentially saves revenue, enhances market value, averts civil lawsuits and maintains a positive company image. A culture of honesty and high ethics. The document emphasizes that the most important way for management to prevent fraud is to communicate effectively, by both statement and deed, that it will not tolerate it. This may seem self-evident, but setting a "tone at the top" goes a long way toward preventing fraud throughout an organization. Because most employees are not in a position to observe the actions of company leaders, management must make sure the value system is shared with all personnel.

Field of study: Business