I next want to discuss the history of the governmental response and the more noteworthy commentary on corporate culture in the last thirty years. Although measures to prevent corporate crime were in effect before the 1980s, one of the more sufficient events was the formation of COSO in 1985. COSO is the Committee of Sponsoring Organizations, a volunteer group formed by the major accounting, finance, and other professional organizations. The committee reviewed instances of fraud and made key recommendations to improve reporting and internal controls. Among these were having an audit committee composed entirely of independent directors, developing a written code of ethics, and recommending that the SEC have new power to bar or suspend those involved in fraudulent financial statement reporting. In addition, COSO established a framework for an effective internal control program, which has become the standard framework for many companies in the United States. The authors next detail the Sarbanes-Oxley Act of 2002, which created the Public Company Accounting Oversight Board and established other procedures and safeguards. Sarbanes-Oxley vastly increased the requirements and protocols for publicly traded companies, as well as creating new laws in the areas of securities fraud, white-collar crime, and whistleblower protection.
After an overview of public and governmental response to fraud, I want to next discuss the subject of internal controls. A successful antifraud program should contain several key elements. These include setting a tone of honesty and integrity among employees, high ethical standards, and evaluating processes and controls on a continual basis. You should take an open approach when dealing with employees on the subject of fraud. The program and a corporate culture that focuses strongly on fraud prevention must be clearly communicated to employees, both to heighten their awareness about the proper procedures for spotting and dealing with the problem and to alert them that a solid fraud prevention system is in place and is a priority of the company executives.
There are many different types of fraud, many of which are prevalent in the workplace. First there is financial statement fraud, which can be deadly to a company both financially and reputationally. Pressure to meet financial need or earnings projections, aggressive accounting practices, questionable legal positions, and a lack of whistleblowers to protect the organization are breeding grounds for financial statement manipulation, often termed cooking the books. Engaging in these practices can often leads to fines, lawsuits, bankruptcy, or criminal prosecution. However, in order to manipulate financial statements successfully, there must be the presence of strong auditors to make sure an audit is completed accurately and impartially. Allowing accounting firms to discuss strategy and offer other accounting services to their clients skews the incentives for honest reporting. It is critical that auditors are able to maintain their independence otherwise the potential for fraudulent reporting increases substantially.