Fraud Prevention on Top of Agenda for Corporate Boards in 2005


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Sarbanes Oxley : Fraud : Investigations

Fraud Prevention on Top of Agenda for Corporate Boards in 2005

Carl Pergola
National Director Corporate Investigations Practice
BDO Seidman

The wheels of justice turned more swiftly in the area of corporate crime in 2004. Convictions were obtained in high profile cases involving Adelphia, Dynergy, Frank Quattrone and Martha Stewart, among others. Since the founding of the President?s Corporate Fraud Task Force in 2002, the Department of Justice has obtained over 500 corporate fraud convictions or guilty pleas, and charged more than 900 defendants and over 60 corporate CEOs and presidents. Despite this increasing enforcement activity, with implementation of Sarbanes-Oxley requirements well underway and new federal sentencing guidelines in place, there should be even more corporate scandals unearthed in 2005.

FIRSTGlobal Investigations, a division of BDO Seidman LLP, the national accounting firm, has compiled the following outlook on corporate fraud for 2005:

New Federal Sentencing Guidelines Shift Fraud Prevention to Boards. Having focused on compliance with Sarbanes-Oxley?s internal control rules in 2004, in the coming year corporate boards will likely turn their attention to the task of creating an anti-fraud environment through the implementation of proactive prevention and training programs. Amendments to the Organizational Sentencing Guidelines, which took effect this past November, shift responsibility for overseeing a corporation?s fraud prevention activities to the board of directors and increase the risk of liability in the event of serious compliance lapses.

Forensic SWAT Teams. As the process of complying with new regulations begins to abate, boards and audit committees will seek additional ways to win the ?good-housekeeping? seal of approval for their oversight policies. In addition to proactive fraud prevention programs, some companies will bring in third-party ?SWAT teams? of forensic accountants to focus on potential problem areas of the company?s accounting treatments and business operations.

Whistleblower Hotlines. The most common means of fraud detection is through tips, the vast majority of which come from employees. With most major companies striving to reach SOX compliance (which encompasses a method for anonymous reporting) by late 2004, look for whistleblower activity to pick-up considerably in 2005 as rank-and- file employees become more comfortable picking up the phone.

Independent Monitors in SEC Enforcement Actions. As part of the settlement of enforcement actions, the SEC will increasingly require that independent monitors oversee the implementation of remedial measures by companies charged with securities violations.

Increasing Power of the Auditor. Given the heightened responsibilities imposed upon outside auditors by Sarbanes-Oxley, and the corresponding risk of auditor liability, outside auditors will be more willing than ever to ?put down the pencil? upon discovering potential financial improprieties and request an independent investigation be conducted.

Real-Time Cyber-Sleuthing. Computer forensics have played a lead role in fraud investigations for some time. In the coming year, look for the emergence of real-time, diagnostic software that will enable corporations to detect ?red flags? of potential accounting fraud or other types of financial misconduct.

Fraud Prevention Moves Beyond Public Companies. Proactive fraud prevention programs will become increasingly common at both private companies and non-profit organizations. Private companies will be spurred to action by the venture capital community and independent directors, while major donors will put similar pressure on non-profits.

BDO Seidman?s FIRSTGlobal Investigations division is comprised of former federal prosecutors and FBI agents, former bank investigators, certified fraud examiners, chartered financial analysts, computer forensics specialists, certified public accountants and other investigative personnel that assist numerous businesses in fraud prevention and the recovery of stolen assets.

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