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Anti-fraud training for audit committees


By By Mary Campbell, Associate Member; Gary W. Adams, David R. Campbell, and Michael P. Rose

SOX and other regulatory standards are forcing audit committees to learn how to prevent fraud. Here's what they need to learn and how you can help them learn it so they will escape litigation, and most importantly, tackle fraud.    

Julie Storm has oversight responsibility for DB Inc.'s new refinery operation in Boleslawiac on the outskirts of Warsaw, Poland. Julie sent refinery effluent samples to a Warsaw lab on two occasions to check for the presence of carcinogens and other residual materials that might contaminate the water supply. Because the lab didn't return reports until almost three weeks later, she decided to send the third sample to a speedier German lab. Both reports from the Warsaw lab indicated no contaminants in the water supply but the German report appeared to be more thorough and offered evidence of two highly carcinogenic contaminants in the effluent. Julie now questions her judgment in sending the sample to the German lab. Her company is in compliance with Poland's laws in presenting the reports from the Warsaw lab and opening the refinery as scheduled. She has spoken with the head of operations at DB and he told her to ignore the analyses from the German lab. What is her ethical obligation?

This hypothetical mini-case is an example of a scenario that members of an audit committee can review during an anti-fraud training group session. Most audit committee members in the past wouldn't have had to place an anti-fraud training meeting on their calendars but the Sarbanes-Oxley Act of 2002 and new regulatory standards (such as the Security Exchange Commission's Final Rule on Listed Companies Audit Committees and PCAOB Standard No. 2) have clearly placed responsibility for fraud prevention within the charter of the audit committee.

With responsibilities sharply delineated, we can expect more fraud litigation directed at audit committees. Companies will be charged with malfeasance; the accusation will be that the committee wasn't properly trained for its role because of management's negligence. This potential liability, coupled with an average fraud loss for an American firm of six percent of annual revenues, provides more than ample justification for proactive and preventative steps by management.

The steps required are: 1) investing in the education of audit committee members on key fraud risks, ethical issues, risk mitigation strategies, and 2) conducting ongoing training in methods to more effectively work with the company's internal audit group (including fraud examiners) to reduce the risk of fraud in their organizations.

In this article, we describe the specific fraud prevention activities of the audit committee, the modes of learning that are most efficacious, and the types of training that are best customized to fit their needs. These methods are accompanied with specific program examples, self-assessment questions to evaluate current performance, resources for self-discovery, and a mini-case (in the lead of the article) for exploring ethical issues. The material presented can be used to create a day-long session as a retreat or, alternatively, shorter programs that can be offered after a meeting or as a separate Web cast at another juncture to committee members at remote or off-site locations. 

 

 

 


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