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News < Back Sarbanes Oxley : Auditing : Thought Leader Develop Insurance against Management Fraud Says AACMI
Frederick D. Lipman, President of AACMI, stated as follows: ?The recent management fraud by the CEO of Refco, Inc. proves once again that despite the best efforts of auditors, boards of directors and regulators, management fraud will persist. The management fraud at Refco, Inc. occurred notwithstanding the fact that Thomas H. Lee Partners hired an excellent law firm to conduct due diligence, despite the audit by a Big Four auditing firm, and despite the due diligence of its underwriters. This proves once again that management fraud is a risk which can never be completely eliminated for investors and should be insured against without requiring proof of fault. ?The assumption made by regulators that such frauds can be eliminated if only the board of directors or auditors were more diligent is belied by the persistency of management fraud both before and after the passage of securities laws. Although greater due diligence can be helpful in uncovering management fraud, excessive pressure on boards of directors and auditors will only produce increased public company costs which are disproportionate to the benefit received.? Mr. Lipman continued: ?The current system requires that, in order to obtain a financial recovery after management fraud, investors must prove that someone was at fault, typically either the board of directors or the auditors. In order to prove fault, substantial legal fees must be expended and in many cases only cents on the dollar are recovered by investors. Insurance against management fraud would permit investors to recover their losses directly from the insurer without proof of fault. It would treat management fraud as an infrequent but recurring phenomenon, similar to a hurricane. Public companies would be required to disclose whether or not they provide this protection for investors.? The Association of Audit Committee Members, Inc. (AACMI) was organized to help develop national best practices for audit committees in light of the corporate corruption scandals. This non-profit organization provides weekly educational material to audit committee members to help them better understand their duties and sponsors quarterly teleconferences featuring prominent speakers. Membership is open to all public, private and non-profit organizations. 
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