The role of the Board of organisations has come on spotlight severally, as a result of numerous fraud cases that keep happening. Though several attempted fraud cases were successfully aborted, the cases that were unfortunately successfully have left Boards of corporations pondering what could have been done differently to avert the incidents. Since the Board has a fiduciary obligation to protect an organisation against fraud, and by extension, has the responsibility for fraud risk management, what precisely does a Board need to do, to prevent or limit the prevalence of corporate fraud?
Unfortunately, there is no place or business across the globe that is immune to fraud; in fact, it is genuinely a global issue. Deliberate concealment and deceit in most cases make it hard to measure the exact magnitude of the harm inflicted by corporate fraud.
Despite the unconscionable concealment in some organisation, the Association of Certified Fraud Examiners (ACFE) provides annual statistics on the magnitude of corporate fraud happening in different continents. According to the 2022 report, a total of $4.7 trillion was lost to fraud in 133 countries. Please see the breakdown at the end.
It was also noted that the average organisation loses 5% of its annual revenue to fraud each year. The data from the ACFE, shows a need to understand the drivers of fraud corporate fraud globally.
As seen from the ACFE report, it is worrisome that it could take as long as fourteen months to unearth a corporate fraud in some instances, thus demonstrating the difficulties faced by organisations to act immediately.
For instance, in 2020, German payment processor, Wirecard Payment Solutions went bankrupt in one of Europe’s biggest frauds. Despite warning indicators and whistleblower reports, the board could not halt the fraudulent accounting practices that had been going on for long, hence the bankruptcy.
Similarly, we are not immune at the local level in Nigeria. Apparently, shareholders and investors are becoming increasingly concerned about the increasing rates and the pervasiveness of corporate fraud in public companies. Financial misdeeds that are barely apparent to the executive management, often go unnoticed or ignored, thereby leading to enormous financial losses. A recent financial institution case readily comes to mind.
A major contributor to corporate fraud is a weak corporate governance. Where board members lack the depth and or the competence to manage complicated processes, it is not surprising to see lapses in the internal controls, and supervision at the board level, thus creating a conducive environment for fraudulent activities. Another is corporate ethics and cultures that place profit making above ethics create a climate where dishonest practices are accepted, in the bid to meet financial related key performance indicators (KPIs). This is the typical prelude to ethical failure as seen in the Enron crisis in 2001. Enron, once a Wall Street darling, fell prey to accounting fraud due to its’ management’s aggressive financial performance. The board’s negligence in curbing and conducting appropriate due diligence wiped away billions in employee pensions and shareholder fund.
A third driver is inadequate enforcement where it has been seen that different regulatory frameworks require varying degrees of enforcement. Gaps between regulatory frameworks, enforcements and sanctions causes inconsistent compliance. Therefore, fraud goes unpunished.
Another driver is the complicated global financial system. Due to worldwide market interconnectedness, globalisation and complicated financial systems make fraud detection harder. Investigating and prosecuting multi-country fraud cases is difficult for multinational organisations. A weak technology environment is also another key driver. Interestingly whilst technology solutions have assisted organisations to create a more secure environment, on the contrary, the deployment of new technologies have also created some opportunities for fraud! Executives struggle with rapidly evolving technologies. Those who fail to keep up with these developments, fall behind and struggle to enforce best and latest practices thereby creating gaps for frauds to occur.
Digitisation brought about vulnerabilities such as cyber breaches, insider trading amidst intricate financial manipulations. Nearly half of all reported fraud instances in 2022 were digital related, according to PwC’s Global Economic Crime and Fraud Survey. This underscores the necessity for the board to exercise vigilance in tech-related governance.
Read also: How Nigerian firms can tackle identity fraud
A Board is ultimately answerable to the organization’s stakeholders and the shareholders. While it’s true that an organisation is not foolproof to fraud, necessary precautions from the Board, can guarantee that occurrences will be few and far in-between. It is therefore necessary to highlight the breadth of the Board’s duties in this area and the potential consequences for failing to detect and mitigate fraud risk.
The first advice is to create an ethical culture and corporate ethics which can help foster a more moral workplace. If employees think the company hates fraud, they’ll be less likely to commit it. A company’s board of directors sets the business’s future growth regulations, which form its foundation. Owing to this, the board should develop a code of behavior or ethics to manage the culture and ethical values of the organisation. This will decrease the number of cases of unethical behavior and increase the ethical behavior of the workers. In-house training should be conducted annually for board members and employees with a completion certificate to confirm attendance. Such training will enhance staff compliance to the organisation values and ethics.
Another is to ensure that Risk Management becomes a crucial part of the organisation’s agenda. One of the board’s numerous responsibilities is to ensure that risks are properly addressed. A board is expected to ensure that adequate internal remediating mechanisms are put in place to identify and mitigate risks, including fraud. Periodic audits are a must to identify security vulnerabilities in a system.
One of the important elements of managing fraud is to implement appropriate Internal Controls. To a large extent, fraud prevention involves creating internal controls that make fraud more difficult to perpetrate, and easy to notice. In a business enterprise, internal controls refer to the containment strategy applied in an organisation to control loss and enforce accountability, integrity, and sound financial reporting. Some best approaches include use of technology across all business operations and processes which allows for traceability and ease of detection. The use of whistleblowing mechanism to encourage a ‘speak-up’ culture and also prevent misconduct. Limiting both physical and digital access controls to authorized personnel only.
Delegation of authority, including marker-checker becomes crucial so as to limit and prevent unauthorised transactions to be created and completed by an individual(s), without appropriate checks.
Setting limits for financial transactions and even other business processes, for different levels within an organisation, so that relevant reviews and authorisation are obtained prior to final approval. Ensuring that intermittent audits or control reviews (both from an internal and independent bodies) to check compliance and enforce adherence to rules. In addition to reviewing the accounting records, it is recommended to have an unbiased third party perform a thorough audit of the financial records/books regularly. To help avoid fraud, it is recommended to schedule occasional concealed audits in high-risk, vital areas of the business.
An important and most often overlooked fraud mitigating control is educating internal stakeholders to spot fraud. Employees or workers of an organisation would also benefit from being acquainted with signs of fraud at their place of work. It is advisable to make staff aware and tell them to practice safety in their work-related dealings with other people. Campaigns on internet-related risks and how to avoid baiting schemes, ‘know-your-client’ procedures e.t.c., will aid a business enterprise to prevent fraud. All employees must be aware of the red flags and how to report any concerns, as they are the first line of defense against fraud since they are more apt to discover it first before management becomes aware.
The bottom line is that in preventing corporate fraud, implementing comprehensive internal controls, performing regular audits of financial records and processes, and fostering a culture of reporting suspicions through whistleblowing hotline, are all ways to uncover corporate fraud.
Afolabi is a Governance and Risk Management expert with over 22 years of experience
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