"Fraud is a blight, not only on business, but on the society as a whole" says Duncan Wiggetts, legal counsel for PricewaterhouseCoopers European Assurance, in South Africa recently to screen his short film drama; "Risking it All."
Fraud and other illegal acts taking place in a company are increasingly the focus of regulator concern and attention, and regulatory oversight bodies are looking at corporate gatekeepers such as independent directors and auditors to limit these occurrences. Where companies fail to react appropriately to the discovery of fraud, and even pressurise external auditors to drop any objections to the quality of the investigation or remediation, the relationship between auditors and Audit Committees can become tense and antagonistic. "In times like these, this relationship can breakdown completely" says Wiggetts "when both parties ought to be in the same boat rowing hard in the same direction."
His film highlights and illustrates the many temptations facing senior company executives. "These can manifest themselves in the use of improper accounting practices in order to inflate revenues so that they achieve performance targets, the company does not disappoint market expectations of turnover, and they, in turn, preserve their bonuses and stock options. In extreme cases, management may even go so far as to bribe other corporate or government officials to ensure that the company wins lucrative contracts or they may even resort to forging documentation."
A recent PwC survey on global corruption highlights that close to half of the executive responding believe this phenomenon to be a serious barrier to the growth of their business, preventing them from entering a specific market or pursuing a particular opportunity. And it goes without saying that should a company get into a serious situation and not address it properly, its reputation could be irreparably harmed.
Wiggetts says that, in his experience, when these matters are uncovered, Audit Committees are sometimes loathe to face them head on. "Some Audit Committees are unhealthily focused on the corporate reporting timetable rather than getting to the bottom of difficult issues finding out how widespread the fraud or illegal activity is in the company and who is involved or who turned a blind eye.. However, by ignoring these problems, audit committee members set themselves and the company up for possible restatements of financial statements, regulatory prosecutions, criminal prosecutions, other lawsuits, disbarment from government tendering, a beaten down share price and a destroyed reputation."
At a panel discussion following the screening of the film at the Gordon Institute of Business Science in Johannesburg and hosted by the Institute of Directors, Mervyn King, corporate governance expert, says that audit committee members must become more involved. "They have to know the business in detail which includes knowledge of the whole group, including its subsidiaries, both local and foreign. When a group is multinational, all of the risk factors become multiplied. Audit committee members also need to increase their focus on the contributions of both internal audit and the risk committee. These are invaluable roles and should not be ignored. And when there is the slightest sign of an irregularity, audit committee members have the duty to enquire further – if not, in certain circumstances, for example untrue statements in a prospectus, they could be personally liable."
Louis Strydom, forensic accounting partner at PwC SA, says audit committee members must rely on independent findings when an investigation is requested. "In-house investigations can be biased. The committee needs to give the independent investigator a clear and unrestricted mandate and if senior company executives should be investigated, this needs to happen."
Strydom says the audit committee should also take credible reports from whistleblowers very seriously."Company staff who evaluate reports from whistleblowers should themselves report to either compliance or the audit committee – not to senior management, as some of the accusations coming in could identify senior executives as allegedly guilty parties. There should also be an effective tracking system for each whistle blowing report that records what gets considered and what does not, and the reasons therefore."
From an external auditors' perspective, Suresh Kana, PwC SA CEO elect, says an attitude of 'professional scepticism' is required. "Any signs of irregularities means the external auditor must look further and not limit his investigation to what was uncovered. He cannot wish away any further potential problems."
Tony Chappel, director at Deneys Reitz attorneys, advises audit committee members to be cautious of any signs of urgency coming from senior management. "Pressure to get things through and bulldozing tactics to get accounts signed off should be seen as a danger signal from the outset and a clear red flag warning."
Wiggetts has used the film to draw attention to the dilemma which could potentially be faced by Audit Committee members who are concerned about other members pushing on with "business as usual" ignoring the danger signs. He believes that Audit Committee members may sometimes need to resign to protect their own position but should first ensure that their objections are formally minuted or recorded as this will help to protect him in a worst case scenario. King recommends taking this further by getting external advice and formally reporting these concerns to the main board of directors. King also raises an interesting provision contained in the new SA Company Law Bill in that the audit committee will in future be appointed by the shareholders, rather than by the board. "This should stimulate some debate as to whom the duty of care is then owed. Traditionally, audit committee members owed this duty to the board – does it then become a duty to the shareholders who appoint them?"
Wiggetts says that the "Risking It All" initiative, which won him the prize of the London Financial Times European In House Counsel Innovator of the Year 2008 and led to him being named as one of the FT top ten legal innovators of the year, was started to help overcome the taboo of discussing fraud and to stimulate debate as to how a company and its advisors should react to evidence of bribery or fraud in the current regulatory environment. "It shows how the audit committee, senior management and external auditors of a company react to a crisis situation, demonstrating what could go wrong if correct decisions are not made at key moments."
Get the latest issue of FAnews