Whistle blowers new heroes of corporate fraud — fraud expert

The Eighth Global Study on Corporate Fraud conducted by Ernst and Young has revealed that approximately 85 percent of the worst fraud committed was done by insiders on the payroll of the respective companies. Over half of the perpetrators were members of the board of management, up from a third in previous surveys. At a seminar on Fraud, Internal Controls and Director Responsibility organised by Ernst and Young and held at the Hilton Hotel, Managing Director of Fraud and Investigations Services, Ernst and Young Americas, David Stulb, said that the cases of Enron and WorldCom had placed US regulators on the alert, resulting in the establishment of the Sarbanes Oxley Act (SOX) of 2002. This Act, Stulb explained, made it mandatory for Security Exchange Commission (SEC) registered firms to assess and attest to the quality of regulatory internal controls. It compelled them to bring squarely into focus the responsibility and obligations of Management, the Audit Committee and the Board of Directors.

While internal control could be an effective means of detecting fraud, the Ernst and Young survey discovered that “whistle blowing” was thought to be the most acceptable way to detect and deter fraud. “Whistle blowers,” Stulb said, “have becomes the new heroes of Corporate Fraud.” The SOX Act, he stated, contained new Whistle Blower sections which will continue to create more instances of fraud allegations. “Even extreme and unsupported allegations must be taken seriously,” he asserted. Fraud risk, he stated, was now higher than before with main contributing factors being the increasing size and complexity of organisations, outdated and ineffective internal controls, inattentive Boards and transient employees, among other things. “Sarbanes,” he went on, “is the US reaction against Corporate Fraud. It is a drive to get shareholder and stakeholder confidence back in the USA.” “What it has done is set a standard that other regulators are all looking at as a bench mark, some taking sections and implementing them into legislation and others coming up with more stringent requirements.” He revealed that many average Americans were hurt by Enron and WorldCom because of pension funds and there is no politician in the United States that is not familiar with Corporate fraud and what the appropriate responses are. “I think that every government is now under pressure by their stakeholders to make sure that there aren’t anymore Enrons and WorldComs,” Stulb maintained.

According to the Ernst and Young study, which surveyed approximately 100 global organisations in more than seven major industries over the past several months, 47 percent of the leading global organisations surveyed were significantly affected by fraud in the past year. Stulb said, “the whole concept of white collar fraud in today’s environment is about conspiracy because one individual cannot cook the books in a company. You need to have a number of individuals and players who are aware of how to do this.” Consequently, the Sarbanes Oxley Act demanded that company CEO’s and CFO’s now certify financial statements, where in the past they were required to make certain representations relevant to financial statements that were released either quarterly or annually. The new act, Stulb explained, called for a deeper understanding of what is taking place in the consolidation process of a financial statement and what the public is relying on to invest in the marketplace. “If the certification process is inaccurate,” he stated, “then these two individuals will be held responsible and could be criminally prosecuted for now executing fiduciary responsibility and professional due care.” He went on to maintain that the SOX Act allowed for real time disclosures of material changes where if management is aware of any information that could be useful to the public, it then becomes responsible for getting this information out to the marketplace. The findings of the Ernst and Young report further revealed cited internal control as one of the most useful means of fraud detection and prevention, alongside management review and internal audit processes. Stulb stressed the importance of convincing management, audit committees and others within the corporate structure that significant internal controls could help “ferret out” incidences of fraud.