• Familiarizes employees with ethical decision-making models
• Establishes an ethics help line with an ethics resource person
• Conducts ethics risk assessments
• Implements effective ethics policies and procedures
• Conducts ethics discussion groups
• Conducts periodic reviews of the treatment of unethical behavior
One of the key elements of an effective anti-fraud program is educating employees about the characteristics of fraud. Fraud is generally defined as an intentional act that results in a material misstatement in financial statements that are the subject of an audit. A fraud differs from an error in that it is an intentional act to deceive.
A properly educated work force is the first line of defense in preventing and detecting fraudulent conduct. An effective fraud education program alerts employees to the potential for fraud, provides guidance on how to recognize fraud when it occurs, and explains what actions to take if they detect fraud. Virtually all employees should undergo some form of fraud education, and it should be customized to address daily fraud control responsibilities, such as the requirement to always obtain two signatures on a corporate check.
To implement an effective fraud education program, in-house compliance counsel should assemble a core group of educational professionals who can teach the fraud curriculum to all levels of personnel. Additionally, vendors and business partners can be included.
POLICIES, PROCEDURES, AND CONTROLS
A company must establish policies and procedures that demonstrate an appropriate “tone at the top” and help guide employees to carry out their daily responsibilities in an ethical and lawful fashion. These should address subjects such as:
• Ethical business practices
• Conflicts of interest
• Reporting of alleged wrongdoing
• Nonretaliation against whistle-blowers
• Internal investigations
• Corporate communications
• Information security
• Handling and retention of company documents
Employees need clear guidance and a thorough understanding of their individual responsibilities. In-house compliance counsel, along with the human resources department, should establish frequent training sessions to ensure that all employees understand compliance.
WHISTLE-BLOWER HOT LINE
Implementing a whistle-blower hot line is a highly effective way to detect fraud both inside and outside the company. According to a 2004 study released by the Association of Certified Fraud Examiners, companies that had confidential reporting mechanisms reduced the amount of fraud losses significantly. The study included 508 cases of occupational fraud totaling more than $761 million in losses. According to the study, 60 percent of actual fraud reported originated through tips from employees, 20 percent from customers, 16 percent from vendors, and 13 percent from anonymous sources.
It is critical that employees have confidence in the hot line’s integrity and in the company’s assurances of confidentiality and nonretaliation. In-house compliance counsel should take an active role in the creation of an anonymous hot line and oversee the investigation of tips. In addition, in-house compliance counsel should draft a whistle-blower policy, monitor how often the hot line is used, determine the nature of the calls to the hot line, and establish internal educational programs to communicate all aspects of the hot line to company employees. Lastly, an important aspect of a comprehensive anti-fraud program is prompt investigation of allegations of fraud and remediation of identified internal control weaknesses.
Ongoing periodic monitoring, testing, and evaluation of the company’s anti-fraud program, together with its controls, policies, and procedures, is a key component of an effective fraud prevention program. The board of directors is responsible for overseeing the monitoring program and senior management for implementing it.
In-house compliance counsel must know, and be able to demonstrate, that existing anti-fraud activities are effective. Furthermore, seemingly innocuous and insignificant changes in the company’s business plan and operational procedures can render some anti-fraud controls obsolete. Accordingly, an effective anti-fraud program must continually evolve with changes to the business structure and procedures.
An effective anti-fraud program can not only diminish the likelihood of fraud, but it may also discourage the theft of corporate assets, diminish the likelihood of legal and regulatory actions, reduce the potential for adverse or qualified opinions by independent auditors, enhance investor confidence, and bolster the company’s reputation in the industry. Moreover, there is increasing evidence that investors, shareholders, insurers, and other stakeholders are willing to “reward” companies that take a proactive approach and implement effective anti-fraud activities.
This is a major undertaking. While no two companies are exactly the same, it is essential that an effective anti-fraud program be tailored to meet each company’s specific needs. It may be necessary, then, for companies to seek the assistance of professional advisers and experts in their implementation of an anti-fraud program.
In order to ensure the overall success of a company’s anti-fraud program, the board and senior management must assume a leadership role. For its part, an effective in-house compliance counsel can orchestrate the smooth functioning of the organization’s anti-fraud program by ensuring that participants do what they’re supposed to do. That way, in the future, in-house compliance counsel may have fewer “fires” to extinguish.
Glenn Pomerantz is a partner in BDO Seidman’s litigation and fraud investigation practice in New York and is the director of BDO’s anti-fraud program, which advises clients on preventing corporate fraud. Robin J. Zablow is a senior manager in BDO Seidman’s litigation and fraud investigation practice in New York.