Question

Party	Overview of Responsibilities
Stockholders	Provide effective oversight through election of board members, through approval of major initiatives (such as buying or selling stock), and through annual reports on management compensation from the board
Board of Directors	Serve as representatives of stockholders; ensure that the organization is run according to the organization’s charter and that there is proper accountability Specific activities include: Selecting management Reviewing management performance and determining compensation Declaring dividends Approving major changes, such as mergers Approving corporate strategy Overseeing accountability activities
Management	Manage the organization effectively; provide accurate and timely accountability to shareholders and other stakeholders Specific activities include: Formulating strategy and risk management Implementing effective internal controls Developing financial and other reports to meet public, stakeholder, and regulatory requirements Managing and reviewing operations Implementing an effective ethical environment
Audit Committees of the Board of Directors	Provide oversight of the internal and external audit function and over the process of preparing the annual financial statements and public reports on internal control Specific activities include: Selecting the external audit firm Approving any nonaudit work performed by the audit firm Selecting and/or approving the appointment of the chief audit executive (internal auditor) Reviewing and approving the scope and budget of the internal audit function Discussing audit findings with internal and external auditors, and advising the board (and management) on specific actions that should be taken
Regulators and Standards Setters (PCAOB, SEC, AICPA, FASB, IAASB, IASB)	Set accounting and auditing standards dictating underlying financial reporting and auditing concepts; set the expectations of audit quality and accounting quality Specific activities include: Establishing accounting principles Establishing auditing standards Interpreting previously issued standards Enforcing adherence to relevant standards and rules for public companies and their auditors

Discuss

Consider the roles and responsibilities of each of these parties with corporate governance responsibilities. Which party do you think is most responsible for preventing fraud? Which party do you think is most responsible for detecting fraud?

Provide formal discussion.

Answer 1

No entity is safe from fraudulent activities. Most common fraudulent schemes include theft or misappropriation of assets of the organization. According to auditing standards, it is the management and governing body who is responsible for preventing or detecting fraudulent practices. It is the management's role to promote an environment where fraudulent practices are not tolerated. It is also responsible for detection of risks of fraud and taking suitable actions against it. On the other hand, it is the responsibility of the governing body to ensure that management carries out the tasks assigned to them related to fraudulent practices.

Under internal audit, some of the responsibilities of management for detection and prevention of fraud can be delegated to internal auditors. Internal auditors can review potential fraudulent practices effeciently if the audit is structured in a way that auditors report directly to board or council. On the other hand, a report by Association of Certified Fraud Examiners suggest that less than ten percent of frauds are detected by external auditors.

It is clear from these facts that it is the management and governing body who are most responsible for preventing and detecting frauds.