The Financial Executives Research Foundation has put some fresh research and analysis to the fraud condundrum, offering companies some new insights on how to address an old problem.
FERF compiled study results and conducted a survey of its own to assemble the latest data and approaches to fortifying a company’s ability to detect and prevent fraud. Of the 79 financial management participants in FERF’s survey, nearly half said their companies do not have an ethics training program. Of those that said they have an ethics training program, nearly 90 percent said the program is effective in inspiring tone at the top and leadership support.
In compiling other study findings, FERF concludes the best defense a company can mount to break the cycle of fraud is to focus on all three sides of the “fraud triangle,” or the three critical factors that contribute to fraud risk. Those factors are: opportunity, created by weak or absent internal controls; financial pressures, which provides the motive for someone to commit fraud; and rationalization, or a weak ethics mindset used to justify fraudulent activity.
FERF says research shows fraud risk is growing rather than declining for companies, despite plenty of regulatory and legislative efforts to the contrary. Citing a survey by Kroll, 66 percent of companies were exposed to fraud risk in 2011-2012, rising to 81 percent in 2012-2013. The FERF report examines some of the major frauds of the past century -- from earnings management at McKesson & Robbins in 1939 and Cendant in 1997 to Enron, WorldCom, Lehman Brothers in the 2000s, to Groupon in 2012 -- assessing their primary causes, key perpetrators, and public policy responses.
In FERF’s survey, 46 percent said they believed the most effective way to root out unethical behavior is through whistleblowers, yet 31 percent of respondents said they did not have such a program. One-third of respondents said they believed internal controls were the most effective way to identify bad behavior.
The report concludes internal controls, ethics training, and whistleblower hotlines are the primary means of preventing and detecting fraud. FERF points out Sarbanes-Oxley and the Public Company Accounting Oversight Board it created have brought new requirements and focus to fraud detection and deterrence, yet fraud continues to rise. “Corporate frauds are continuing and the ultimate effectiveness of SOX and the PCAOB in reducing fraud is still to be determined,” the report says.