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Zero tolerance for fraud


Do you have adequate procedures to prevent bribery in place?

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In the shadow of London Fashion Week it is appropriate that corporate culture and governance are set to become the new business “black” this Autumn.

In the face of unprecedented levels of scandal affecting our politicians, police, newspapers and major financial institutions, it is little wonder that business and political leaders are shining a spotlight on corporate governance and culture. At this time the role of the chief financial officer is more critical than ever in protecting UK plc.

Typically, the environment in which fraud and scandal flourish has four characteristics. These include incentive or pressure to meet short term goals, opportunity afforded by weak controls, a dominant individual or ineffective regulation and finally no expectation of being caught or censured.

Get it wrong and the economic effects of a damaged reputation can be catastrophic as forcefully illustrated by the fate of former accountancy heavyweight Arthur Andersen’s and more recently by the News of the World.

Both had robust brands that were destroyed in a matter of weeks by a suspicion of wrong doing. The need for a strong culture that does not tolerate fraud together with governance procedures to match is now an essential component for the success of any business.

Of course, in the world of finance we are no strangers to fraud. The top five financial frauds that companies have historically engaged in have involved concealment of liabilities, fictitious revenues, overstated asset values, improper or no disclosure, for example of contingent liabilities or cross guarantees, and creating timing differences that broadly involve accelerating revenue and/or delaying expenditure.

Bear in mind also that fraud is different to error. The critical issue is intent. Mistakes might best be characterised as unintentional errors, while fraud is the use of deception or deliberate misrepresentation to obtain an unjust or illegal advantage.

Broaden the control environment

To address exposure in these areas financial controls and procedures will be in place but it is now time to broaden the control environment. The CFO should conduct a full organisational risk assessment that encompasses all aspects of business from customer profile -- what countries do you do business in? Do you work with any government agencies? -- to supplier and employee credentials and corporate culture.

Perhaps most importantly, make it clear that your organisation has a zero tolerance policy in respect of fraud and governance issues. Remember that from a Bribery Act perspective a defence to section 7 – ‘failure of commercial organisations to prevent bribery’ - is that adequate procedures to prevent bribery are in place.

Implementing a zero tolerance policy is a hearts-and-minds challenge that will form the bedrock of the culture that a company has in place. What are the company’s ethics and values and are these widely promoted in staff induction procedures, staff meetings and employee handbooks?

Remember too that any corporate culture is permeated from the top. Management has to lead by example – the Murdoch enquiry has shown us that a failure by management to fully engage or claim ignorance of what is really going on is a poor defence.

When it comes to discovery most fraud and governance issues come to light as a result of tip off or whistleblowing. It will come as no surprise that one of the most effective controls any company can have in place is a hotline for employees, customers and suppliers to report fraud or governance issues. The hotline number should be well advertised throughout the company.

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Zero tolerance for fraud
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