Follow Up: It’s a New Dawn, It's a New Day in Corporate Governance

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GUEST BLOGGER

Sheila Keefe, CFE, CPA
Principal, BDR Advisors LLC

FOLLOW UP: Board directors must devote adequate resources to address fraud

James Murdoch, News Corporation’s deputy chief operating officer, found his career implode shortly after his testimony in front of Parliament was disputed by two high-level News Corp. executives. According to the executives, Murdoch knew that the hacking was a more pervasive problem as early as 2008. Perjury aside, the corporate governance concern has to be the lack of adequate investigation and response employed by Murdoch. Rather than launching a full investigation into the hacking as he had claimed, News Corp. underwrote only two limited-scope investigations. The first in 2006 was a preliminary investigation in the wake of the reporter’s arrest. The second investigation, supposedly more expansive, took place in 2007 in response to a wrongful termination lawsuit by the shady reporter; that investigation involved questions focused on just five staffers related to the terminated reporter.

Lack of adequate investigation into suspected fraud has been at the center of other recent board director woes; specifically, infoGroup Inc. and DHB Industries. For infoGroup, audit committee chairperson Vasant Raval was prosecuted for inadequately investigating fraud. In response to allegations of self-dealing by the CEO, Raval conducted a one-man investigation that lasted just 12 days. According to reports, the audit committee chairman did not look into the CEO’s expenses. With DHB Industries, 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.

The SEC has come out and said that it does not wish to concern the majority of hard-working board directors: "We will not second-guess the good-faith efforts of directors. But in stark contrast, Krantz, Chasin and Nadelman were [DHB Industries] directors and audit committee members who repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers," said Robert Khuzami, director of the SEC's Division of Enforcement.

What can be learned from these recent scandals involving News Corporation, infoGroup Inc. and DHB Industries is that board directors and audit committee members must be strident in their investigations into allegations of fraud and devote adequate resources to address fraud, known and unknown.

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.