The Fiduciary Responsibilities of the Board
Fraud happens everywhere, in all industries and in companies of all sizes, and research by the Association of Certified Fraud Examiners (“ACFE”) shows that those organizations that focused more on fraud have less risk of fraud occurring. Organizations worldwide lose an estimated five percent of annual revenue to fraud, according to the ACFE 2014 Global Fraud Study. The results of this study demonstrate that the presence, or lack thereof, of Board oversight has a profound effect on the median loss and duration of fraud. The business case for managing fraud risk should be at the front of every director’s mind when considering the cost/benefit of fraud detection and prevention efforts.
The basic fiduciary duty of care principle, which requires a director to act in good faith with the care an ordinarily prudent person would exercise under similar circumstances, is being tested in today’s business climate. Personal liability for directors, including removal from the Board, civil penalties, and tax liability, as well as damage to the reputation of themselves and their organizations, appears not so far from reality as once widely believed. Yet, many directors continue to be in the mindset of “that won’t happen in my organization.” Because of this, a basic understanding of the director’s fiduciary obligations and how the duty of care may be exercised in overseeing the organization’s internal control and compliance systems has become critical.
While fraud risk management should be a part of an overall risk management program, effectively addressing the risk of fraud requires dedicated, deliberate focus and consideration, including a formal process for oversight by directors. The Institute of Internal Auditors, American Institute of Certified Public Accountants, and ACFE jointly recommended that the committee charged with fraud risk oversight “should meet frequently enough, for long enough periods, and with sufficient preparation to adequately assess and respond to the risk of fraud, especially management fraud, because such fraud typically involves override of the organization’s internal controls.”
Dedicated and observable fraud risk oversight activities by the Board will not only enhance the ethical reputation of the organization but will also set the stage for an antifraud culture within their organization. Moreover, the directors’ proactive involvement in fraud risk management initiatives has the added benefit of serving as a strong deterrent to fraud by heightening the perception of detection throughout the organization. Increasing the perception that potential fraudsters will be caught is among the most effective deterrence mechanisms available.
Accordingly, a director must be educated on fraud’s “red flags” and be willing to ask the tough questions, both of a general nature and specific to potential fraud risks. The best director is inclined to think like an investigator when details don’t add up or explanations don’t make sense. Answers should not be accepted at face value as necessarily accurate or even, in some cases, honest or truthful.
By requiring, implementing, and overseeing a proactive fraud risk management plan, directors will meet their fiduciary responsibilities, while helping to secure a financially and ethically sound future for their organization.
For more information or if you have concerns about your organization, contact Reggie Novak at 216-831-7171 or firstname.lastname@example.org.
Reggie is a Senior Manager in the Audit and Accounting Services Group. As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services including recommending internal controls and other measures to be implemented to prevent theft or misappropriation. If fraud is suspected, he can investigate and present his findings and recommendations.