Worried? Who’s Worried? What Board Directors Need To Know

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GUEST BLOGGER

Sheila Keefe, CFE
Principal, BDR Advisors, LLC
Lake Geneva, WI

As reported in Monday's Chicago Tribune, the SEC charged three ex-directors who served on DHB Industries Inc.'s audit committee for being "willfully blind to numerous red flags" of fraud. Just last year, the SEC accepted a settlement that included a $50,000 fine and a restriction against serving as a director or officer for five years from an audit committee chairperson, stating that the director failed to adequately investigate allegations on inappropriate related-party transactions. The SEC has made it clear that it will hold directors accountable for fraud deterrence. So, what can board directors do?

  1. Leverage internal audit or hire a consultant. Be sure your advisors remain outside the reporting lines of CEOs and CFOs.
  2. Implement a fraud risk management program to proactively address emergent threats to your organization. Sadly, only half of organizations have formal board risk oversight of fraud deterrence (2010 COSO Report).
  3. Know the business. Look for complex transactions that are more form than substance.
  4. Support fraud deterrence by continuous monitoring, surprise audits, segregation of duties, hotlines and ethics training. 
  5. Address the Audit Report Expectation Gap. Revenue recognition, estimates, disclosures, related party transactions are areas most vulnerable to manipulation.
  6. Ensure auditor independence. Let your auditors know that you want the unvarnished truth.
  7. Watch out for management influence over financial reporting and their ability to override controls.

Fraud deterrence is a game of endurance. By following the steps listed above, directors will be well on their way to addressing their fiduciary responsibilities effectively and efficiently.

To read more about Sheila or to follow her blog, Business Done Right, go here.