Beyond Compliance

Fraud prevention culture that works

By By Martin T. Biegelman, CFE, ACFE Fellow; and Joel T. Bartow, CFE, CPP

(Excerpted and adapted with permission from chapter 17 of
"Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance,"
published by John Wiley & Sons, Inc. ©2006.)

A heightened awareness of fraud and fraud prevention is critical to an organization's success. Implementing the new and enhanced corporate governance requirements is just the beginning of a culture of compliance. Having a checklist mentality is clearly not enough, no matter how many internal control mechanisms one has. Fraud can invade any organization, be it large or small, new or old. There was corporate fraud long before Sarbanes-Oxley was ever conceived. Unfortunately, there will be fraud no matter how many compliance requirements are enacted. However, with a true culture of compliance, fraud can be greatly lessened and even prevented.

As expected, not every executive has embraced the idea that Sarbanes-Oxley is necessary. In a 2005 survey of 186 corporate executives, 34 percent said that Sarbanes-Oxley should be repealed.1 Businesses may be resistant when new and possibly onerous government regulations are enacted. An almost universal complaint from businesses has been the huge expense related to compliance with the various sections of Sarbanes-Oxley, especially Section 404, with its strong requirements for reviews of internal controls. Companies have complained that in addition to the high costs for compliance, the expensive procedures have failed to detect significant material weaknesses in internal controls. Only eight percent of companies reported material weaknesses as a result of Section 404, but these are companies with market capitalizations of more than $75 million.2 Investors are jittery after their huge losses in the stock market, so even eight percent is still more than might have been publicly reported before Sarbanes-Oxley. Then Public Company Accounting Oversight Board (PCAOB) Chairman William J. McDonough stated that investors strongly support these improved financial controls because they "make financial statements more believable and more reliable."3  

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