Fraud remains a pervasive problem for businesses across the world. Nevertheless, most business ethics programs are compliance driven and thus fail to handle a significant part of adfraud protection —the danger of latent rationalization at the average person level. The authors recommend adopting counteractive control development programs that can significantly improve the effectiveness of an organization's ethics program by reducing this risk in its workforce. Their proposal is really a step-by-step, adaptable plan for the implementation of a counteractive control development program that may be used by organizations of all sizes, types, and industries.
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Over the past three decades, corporate scandals such as for example Enron, WorldCom, Wells Fargo, and Valeant Pharmaceuticals have stirred a heightened concentrate on the factors behind fraudulent behavior and ethical lapses in the context of large businesses. These scandals have also triggered a movement by public companies to develop ethics programs and by the accounting profession to compel accountants to be ethical leaders. Despite these efforts, fraud remains a massive problem. The newest Are accountable to the Nations: 2018 Global Study on Occupational Fraud and Abuse, a biennial report published by the Association of Certified Fraud Examiners (ACFE), identified 2,690 cases of occupational fraud from 125 industries, with total losses exceeding $7 billion. Moreover, small businesses, defined as those having fewer than 100 employees, incurred not only the greatest percentage of fraud-related cases (28%), but also the greatest median loss per occurrence ($200,000). Medium-size businesses, defined as those having between 100 and 10,000 employees, represented 48% of cases, with a median lack of $100,000. All told, businesses lose an estimated 5% of total annual revenues to fraudulent behavior.
The continued pervasiveness of business fraud in the global economy creates serious doubts regarding sufficiency of current ethics programs in preventing fraud. Key statistics present in the ACFE report provide some important insights on how companies can reinforce their ethics programs and their ability to avoid fraudulent behavior within their organizations. Surprisingly, 94% of the perpetrators of fraud had no prior criminal record, and 85% had never been punished or terminated for previous occupational fraud. Ostensibly, ethical practices built to screen out potentially unethical employees (e.g., pre-employment background checks) aren't in themselves a guarantee of an ethical workforce. Thus, all businesses, irrespective of their size or type, must recognize the danger that they have some employees (i.e., decision makers) with marginal or underdeveloped ethical attitudes despite their efforts to screen such employees out through the hiring process. These decision makers represent a latent ethical risk to businesses, since they are the people most prone to succumb to organizational or financial pressure and rationalize fraud; however, these decision makers may also be possibly the most prone to benefit from targeted programs built to strengthen their individual ethical resolve (i.e., their integrity).
Most business ethics programs fail to specifically address the danger of latent rationalization at the degree of the average person decision maker within the workforce, even though it is people who make ethical (or unethical) decisions. Consequently, these ethics programs miss a significant ethical component in combating fraud. The discussion below first addresses the ethical orientations in operation ethics programs, showing that many ethical orientations and ethical practices are derived from federal compliance guidelines, which at best only target the latent threat of rationalization. Then it covers counteractive control development and the related techniques and practices that can potentially reduce latent rationalization risk at the degree of the average person decision maker. The authors recommend adopting counteractive control development programs that can significantly improve the effectiveness of an organization's ethics program by reducing the degree of latent rationalization risk in the workforce. This information proposes a highly effective, step-by-step, adaptable plan for the implementation of a counteractive control development program that may be used by organizations of all sizes, types, and industries.
For several years, internal controls have now been the focus of auditors'risk assessment while they seek to attest that the control environment is working effectively to minimize the possibility of fraud. As standards have evolved to target more on fraud, so has technology. Innovations such as for example artificial intelligence (AI), robotic process automation (RPA), and blockchain have now been touted as tools that may assist in identifying fraud; however, what if they actually make that job much more difficult by enabling potential fraudsters to perpetrate better quality and harder-to-detect crimes? The writer investigates this question and arrives at some disturbing conclusions.
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From 2000 to 2002, corporate accounting and financial scandals rocked investors, ultimately costing individuals billions of dollars, collapsing major corporations, and drastically upsetting confidence in U.S. securities markets. Companies such as for example Enron and WorldCom, among many others, were embroiled in financial scandal. Off–balance sheet loans, manipulation of commodity prices, improper accounting practices, falsified financial results—these improprieties all centered on the relatively unregulated environment at the time.
That supposedly changed on July 30, 2002, with the passage of the Sarbanes-Oxley Act (SOX). Prior to SOX's enactment, auditors operated in a self-regulated, peer-reviewed environment whose standards were set by FASB and overseen by the AICPA. SOX mandated SEC oversight and created the PCAOB, that was faced with establishing auditing and related attestation, quality control, ethics, and independence standards and rules to be utilized by registered public accounting firms in the preparation and issuance of audit reports. SOX also took numerous steps to reform the general public accounting profession, including establishing standards for auditor independence, requiring enhanced financial disclosures, and promising criminal adfraud protection accountability.
Nevertheless the accounting profession was not the only institution that needed to change. Corporations themselves were forced by SOX to handle boardroom failures that led, or at the very least contributed, to these scandals, including their lackluster “deferred maintenance” attitude to the device of internal controls over financial reporting (ICFR). Improving corporate governance and executive fiduciary responsibility were paramount to SOX's success in curbing future improprieties, and it took those things directly by directly addressing loans to related parties, management oversight, due diligence by directors, and compensation of officers, along with requiring independent audit committees and an ethics code for financial officers. Title III of SOX specifically requires the CEO and CFO to certify not only this they've reviewed financial reports, but also they believe the financials fairly represent the company's financial position. If, at a later date, financial statements should be reissued as a result of noncompliance with GAAP, executives must return any bonuses received for that year, hopefully eliminating any financial incentive to inflate earnings.
