Question

1. What is the role of corporate governance in fraud prevention?

2. What is the role of the board or directors when it comes to fraud?  And, what should the stakeholder expect from the board of directors.

3. Identify ethical issues, conflicts of interest, and noncompliance with corporate policies and procedures in the Enron and World Com cases.

Answer 1

Corporate governance refers to the policies and procedures according to which an organization is operated, regulated and controlled. These processes are designed to protect the diverse interests of the organization’s stakeholder groups. Effective corporate governance measures are also essential to prevent corporate scandals, fraud, and potential civil and criminal liability.

1. Role of Corporate Goverance in fraud prevention are taken in following steps:

Set appropriate Corporate Goverance: Preventing fraud starts with appropriate corporate governance. Appropriate corporate governance is set by the organization’s upper management. Upper management projects its integrity onto the entire organization.

Assess Fraud Risk: Assessing the risk of fraud within the organization is important because it can point to where internal control deficiencies exist and where the organization can improve. Assessing fraud risks can be done by brainstorming ways which the organization could be defrauded. Internal control assessments may also be performed to assess fraud risk.

2. Fraud prevention starts in the board room. The organization’s vision, mission, policies and tone at the top all trickle down throughout the various layers of the company, from senior management to middle management to front line employees. Even though a Board of Directors may be comprised of individuals with appropriate education, financial knowledge and experience, fraud and misconduct still occurs in some cases. Board members must have a mindset of being independent of management or other directors. A board member who is complacent, conforms to the majority or is essentially a ‘yes man’ cannot provide meaningful governance for an organization. Board members need to be willing to question management and other board members in the decision making and reporting processes. The Board must have the means, resources and ability to engage outside experts such as forensic accountants, external legal counsel and / or consultants when deemed necessary, whether it be to investigate potential fraud or misconduct, or to seek independent advice in the decision making process.