Catherine Lofland, CPA
ACFE Research Specialist
The average person can name several corporate scandals off the top of their head. Once a fraud scandal becomes a household name, the victim organization may never recover from the damage to its reputation. The effects are far-reaching: employees, investors, creditors, vendors, customers and the community are among those who can suffer tremendously from fraud. The pervasive threat of corporate malfeasance indicates companies need to seriously consider whether they have effective systems in place to prevent such scandals. While strong internal controls, independent external audits, an ethics program and a whistleblower policy are effective fraud deterrents and detection methods, these measures succeed only when supported by a robust corporate governance system.
Corporate governance refers to the procedures and processes according to which an organization is controlled. It consists of the official policies promoting oversight and accountability in a variety of areas, including financial reporting, corporate strategy and risk management. You can think of corporate governance as a system of checks and balances similar to those outlined in the U.S. Constitution, which allows each branch of the government to regulate one another. An organization’s checks and balances are designed to protect the diverse interests of its stakeholder groups by keeping management and the board in line.
One of the biggest challenges in implementing a corporate governance system is that some companies, especially smaller organizations, don’t see any reason to change the status quo. This “if it ain’t broke, don’t fix it” attitude toward fraud prevention can be dangerous. Managers who exhibit this attitude aren’t concerned about fraud simply because they haven’t suffered from it yet. However, if an organization has a weak corporate governance structure, a devastating fraud might be just around the corner.
Our latest online self-study course, Corporate Governance for Fraud Prevention, describes the principles, functions and essential components of a corporate governance system. It addresses the controversy of CEO duality, the recommended committees any organization should have on its board of directors and how to set the appropriate tone at the top. The course discusses corporate governance best practices that you can tailor to your organization’s structure and needs, since there is no one-size-fits-all approach.
Many corporate governance programs are born from a crisis. But it is critical not to wait until disaster strikes at your organization to begin implementing an effective corporate governance system. While establishing preventive measures might seem costly and burdensome, they are vital to the success, reputation and longevity of your company.