How audit committees can help deter fraud

As the eyes and ears of the board, the audit committee plays a pivotal role in helping to stop or reverse the rise in reported fraud incidents worldwide.

Thirty-six percent of more than 6,000 respondents in PwC’s global economic crime survey in 2016 said their organizations were affected by economic crime—down slightly from the 37% of respondents who reported being affected in the 2014 survey. The five most frequent frauds were asset misappropriation, cybercrime, bribery and corruption, procurement fraud, and accounting fraud.

“It’s everybody’s job in the company to deter fraud,” said Chris Rogers, CPA, CGMA, the CFO at Infragistics, a New Jersey software developer with operations on five continents.

Among employees, CFOs and controllers often shoulder much of the responsibility to prevent fraud. On the board level, the independent business experts from outside the company who sit on the audit committee take on a special role as fraud busters.

Regulation has bolstered the role of the audit committee in past years. Audit committee members work with the independent auditor to ensure that the company’s financial results are accurately portrayed, said Rogers, who has served on audit committees at different companies for more than a decade. They also make sure sound internal controls are in place and working to prevent fraud, and those controls should uncover fraud quickly and effectively when it occurs.

Given unfettered access, audit committee members can be invaluable conduits of information between the board and the CFO. “In my world [as CFO], the audit committee is my ally on the board,” Rogers said.

Committee members should not underestimate their influence on the company’s top management to act ethically, according to a recent PwC report on how audit committees can maximize their performance.

To assess and influence company culture, audit committee members can delve into employee and customer surveys and exit interviews. They can meet with employees outside the executive suite (57% of them did in 2015) and review communications between the CEO and employees to gain additional perspectives regarding the company’s culture.

Rogers recommended installing an employee whistleblower hotline that goes directly to audit committee members.

For audit committees to do their pivotal role justice, PwC suggested members also embrace fraud deterrence by:

• Ensuring management performs robust annual reviews of the company’s compliance programs and reporting systems.
• Requesting periodic updates on the external enforcement environment and the company’s fraud training and prevention programs.
• Being familiar with the requirements for ethical conduct programs that comply with laws such as the Foreign Corrupt Practices Act, the Dodd-Frank whistleblower rules, and the U.K. Bribery Act.
• Understanding the nature and volume of allegations reported to the company’s whistleblower hotline.
• Requesting periodic updates from management about reported allegations.
• Understanding the company’s response to whistleblower laws and whether additional measures should be taken.

The original version of this article, “How Audit Committees Can Help Deter Fraud,” by Sabine Vollmer, is available at cgma.org.

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CGMA Magazine is published in conjunction with the Chartered Global Management Accountant designation, which was created through a partnership between the AICPA and CIMA. The magazine offers news and feature articles focused on elevating and emphasizing management accounting issues.